Periosteum provides a major source of mesenchymal progenitor cells for bone fracture repair. Combining cell-specific targeted Cox-2 gene deletion approaches with in vitro analyses of the differentiation of periosteum-derived mesenchymal progenitor cells (PDMPCs), here we demonstrate a spatial and temporal role for Cox-2 function in the modulation of osteogenic and chondrogenic differentiation of periosteal progenitors in fracture repair. Prx1Cre-targeted Cox-2 gene deletion in mesenchyme resulted in marked reduction of intramembraneous and endochondral bone repair, leading to accumulation of poorly differentiated mesenchyme and immature cartilage in periosteal callus. In contrast, Col2Cre-targeted Cox-2 gene deletion in cartilage resulted in a deficiency primarily in cartilage conversion into bone. Further cell culture analyses using Cox-2 deficient PDMPCs demonstrated reduced osteogenic differentiation in monolayer cultures, blocked chondrocyte differentiation and hypertrophy in high density micromass cultures. Gene expression microarray analyses demonstrated downregulation of a key set of genes associated with bone/cartilage formation and remodeling, namely Sox9, Runx2, Osx, MMP9, VDR and RANKL. Pathway analyses demonstrated dysregulation of the HIF-1, PI3K-AKT and Wnt pathways in Cox-2 deficient cells. Collectively, our data highlight a crucial role for Cox-2 from cells of mesenchymal lineages in modulating key pathways that control periosteal progenitor cell growth, differentiation, and angiogenesis in fracture repair.