Osteoarthritis is a highly prevalent and debilitating joint disorder. There is no effective medical therapy for osteoarthritis due to limited understanding of osteoarthritis pathogenesis. We show that TGF–β1 is activated in the subchondral bone in response to altered mechanical loading in an anterior cruciate ligament transection (ACLT) osteoarthritis mouse model. TGF–β1 concentrations also increased in human osteoarthritis subchondral bone. High concentrations of TGF–β1 induced formation of nestin + mesenchymal stem cell (MSC) clusters leading to aberrant bone formation accompanied by increased angiogenesis. Transgenic expression of active TGF–β1 in osteoblastic cells induced osteoarthritis. Inhibition of TGF–β activity in subchondral bone attenuated degeneration of osteoarthritis articular cartilage. Notably, knockout of the TGF–β type II receptor (TβRII) in nestin + MSCs reduced development of osteoarthritis in ACLT mice. Thus, high concentrations of active TGF–β1 in the subchondral bone initiated the pathological changes of osteoarthritis, inhibition of which could be a potential therapeutic approach.