Two decades after signals controlling bone length were discovered, the endogenous ligands determining bone width remain unknown. We show that postnatal establishment of normal bone width in mice, as mediated by bone-forming activity of the periosteum, requires BMP signaling at the innermost layer of the periosteal niche. This developmental signaling center becomes quiescent during adult life. Its reactivation however, is necessary for periosteal growth, enhanced bone strength, and accelerated fracture repair in response to bone-anabolic therapies used in clinical orthopedic settings. Although many BMPs are expressed in bone, periosteal BMP signaling and bone formation require only Bmp2 in the Prx1-Cre lineage. Mechanistically, BMP2 functions downstream of Lrp5/6 pathway to activate a conserved regulatory element upstream of Sp7 via recruitment of Smad1 and Grhl3. Consistent with our findings, human variants of BMP2 and GRHL3 are associated with increased risk of fractures.