Diabetes interferes with fracture repair; therefore, we investigated mechanisms of impaired fracture healing in a model of multiple low-dose streptozotocin-induced diabetes. Microarray and gene set enrichment analysis revealed an up-regulation of gene sets related to inflammation, including tumor necrosis factor (TNF) signaling in the diabetic group, when cartilage is being replaced by bone on day 16, but not on days 12 or 22. This change coincided with elevated osteoclast numbers and accelerated removal of cartilage in the diabetic group (P < 0.05), which was reflected by smaller callus size. When diabetic mice were treated with the TNF-specific inhibitor, pegsunercept, the number of osteoclasts, cartilage loss, and number of TNF-␣ and receptor activator for nuclear factor kB ligand positive chondrocytes were significantly reduced (P < 0.05). The transcription factor forkhead box 01 (FOXO1) was tested for mediating TNF stimulation of osteoclastogenic and inflammatory factors in bone morphogenetic protein 2 pretreated ATDC5 and C3H10T1/2 chondrogenic cells. Osteopenia associated with decreased bone mineral density is an important complication of type 1diabetes.