We investigated deleterious changes that take place in mesenchymal stem cells (MSC) and its fracture healing competence in ovariectomy (Ovx)-induced osteopenia. MSC from bone marrow (BM) of ovary intact (control) and Ovx rats was isolated. (99m)Tc-HMPAO (Technitium hexamethylpropylene amine oxime) labeled MSC was systemically transplanted to rats and fracture tropism assessed by SPECT/CT. PKH26 labeled MSC (PKH26-MSC) was bound in scaffold and applied to fracture site (drill-hole in femur metaphysis). Osteoinduction was quantified by calcein binding and microcomputed tomography. Estrogen receptor (ER) antagonist, fulvestrant was used to determine ER dependence of osteo-induction by MSC. BM-MSC number was strikingly reduced and doubling time increased in Ovx rats compared to control. SPECT/CT showed reduced localization of (99m)Tc-HMPAO labeled MSC to the fracture site, 3 h post-transplantation in Ovx rats as compared with controls. Post-transplantation, Ovx MSC labeled with PKH26 (Ovx PKH26-MSC) localized less to fracture site than control PKH26-MSC. Transplantation of either control or Ovx MSC enhanced calcein binding and bone volume at the callus of control rats over placebo group however Ovx MSC had lower efficacy than control MSC. Fulvestrant blocked osteoinduction by control MSC. When scaffold bound MSC was applied to fracture, osteoinduction by Ovx PKH26-MSC was less than control PKH26-MSC. In Ovx rats, control MSC/E2 treatment but not Ovx MSC showed osteoinduction. Regenerated bone was irregularly deposited in Ovx MSC group. In conclusion, Ovx is associated with diminished BM-MSC number and its growth, and Ovx MSC displays impaired engraftment to fracture and osteoinduction besides disordered bone regeneration.