Osteoblasts, the bone forming cells, affect self-renewal and expansion of hematopoietic stem cells (HSCs), as well as homing of healthy hematopoietic cells and tumor cells into the bone marrow. Constitutive activation of β-catenin in osteoblasts is sufficient to alter the differentiation potential of myeloid and lymphoid progenitors and to initiate the development of acute myeloid leukemia (AML) in mice. We show here that Notch1 is the receptor mediating the leukemogenic properties of osteoblast-activated β-catenin in HSCs. Moreover, using cell-specific gene inactivation mouse models, we show that FoxO1 expression in osteoblasts is required for and mediates the leukemogenic properties of β-catenin. At the molecular level, FoxO1 interacts with β-catenin in osteoblasts to induce expression of the Notch ligand, Jagged-1. Subsequent activation of Notch signaling in long-term repopulating HSC progenitors induces the leukemogenic transformation of HSCs and ultimately leads to the development of AML. These findings identify FoxO1 expressed in osteoblasts as a factor affecting hematopoiesis and provide a molecular mechanism whereby the FoxO1/activated β-catenin interaction results in AML. These observations support the notion that the bone marrow niche is an instigator of leukemia and raise the prospect that FoxO1 oncogenic properties may occur in other tissues.