Cells of the osteoblast lineage affect the homing(1,2) and the number of long-term repopulating haematopoietic stem cells(3,4), haematopoietic stem cell mobilization and lineage determination and B cell lymphopoiesis(5-7). Osteoblasts were recently implicated in pre-leukaemic conditions in mice(8,9). However, a single genetic change in osteoblasts that can induce leukaemogenesis has not been shown. Here we show that an activating mutation of beta-catenin in mouse osteoblasts alters the differentiation potential of myeloid and lymphoid progenitors leading to development of acute myeloid leukaemia with common chromosomal aberrations and cell autonomous progression. Activated beta-catenin stimulates expression of the Notch ligand jagged 1 in osteoblasts. Subsequent activation of Notch signalling in haematopoietic stem cell progenitors induces the malignant changes. Genetic or pharmacological inhibition of Notch signalling ameliorates acute myeloid leukaemia and demonstrates the pathogenic role of the Notch pathway. In 38% of patients with myelodysplastic syndromes or acute myeloid leukaemia, increased beta-catenin signalling and nuclear accumulation was identified in osteoblasts and these patients showed increased Notch signalling in haematopoietic cells. These findings demonstrate that genetic alterations in osteoblasts can induce acute myeloid leukaemia, identify molecular signals leading to this transformation and suggest a potential novel pharmacotherapeutic approach to acute myeloid leukaemia.