Abstract The bone marrow microenvironment influences malignant hematopoiesis, but how it promotes leukemogenesis has not been elucidated. In addition, the role of the bone marrow stroma in regulating clinical responses to DNA methyltransferase inhibitors (DNMTi) is also poorly understood. In this study, we conducted a DNA methylome analysis of bone marrow–derived stromal cells from myelodysplastic syndrome (MDS) patients and observed widespread aberrant cytosine hypermethylation occurring preferentially outside CpG islands. Stroma derived from 5-azacytidine–treated patients lacked aberrant methylation and DNMTi treatment of primary MDS stroma enhanced its ability to support erythroid differentiation. An integrative expression analysis revealed that the WNT pathway antagonist FRZB was aberrantly hypermethylated and underexpressed in MDS stroma. This result was confirmed in an independent set of sorted, primary MDS-derived mesenchymal cells. We documented a WNT/β-catenin activation signature in CD34+ cells from advanced cases of MDS, where it associated with adverse prognosis. Constitutive activation of β-catenin in hematopoietic cells yielded lethal myeloid disease in a NUP98–HOXD13 mouse model of MDS, confirming its role in disease progression. Our results define novel epigenetic changes in the bone marrow microenvironment, which lead to β-catenin activation and disease progression of MDS. Cancer Res; 77(18); 4846–57. ©2017 AACR.