Host compatible rhizobia induce the formation of legume root nodules, symbiotic organs within which intracellular bacteria are present in plant-derived membrane compartments termed symbiosomes. In Medicago truncatula nodules, the Sinorhizobium microsymbionts undergo an irreversible differentiation process leading to the development of elongated polyploid noncultivable nitrogen fixing bacteroids that convert atmospheric dinitrogen into ammonia. This terminal differentiation is directed by the host plant and involves hundreds of nodule specific cysteine-rich peptides (NCRs). Except for certain in vitro activities of cationic peptides, the functional roles of individual NCR peptides in planta are not known. In this study, we demonstrate that the inability of M. truncatula dnf7 mutants to fix nitrogen is due to inactivation of a single NCR peptide, NCR169. In the absence of NCR169, bacterial differentiation was impaired and was associated with early senescence of the symbiotic cells. Introduction of the NCR169 gene into the dnf7-2/NCR169 deletion mutant restored symbiotic nitrogen fixation. Replacement of any of the cysteine residues in the NCR169 peptide with serine rendered it incapable of complementation, demonstrating an absolute requirement for all cysteines in planta. NCR169 was induced in the cell layers in which bacteroid elongation was most pronounced, and high expression persisted throughout the nitrogen-fixing nodule zone. Our results provide evidence for an essential role of NCR169 in the differentiation and persistence of nitrogen fixing bacteroids in M. truncatula.