Fibrous dysplasia (FD; Online Mendelian Inheritance in Man no. 174800) is a crippling skeletal disease caused by activating mutations of the gene, which encodes the stimulatory G protein Gα FD can lead to severe adverse conditions such as bone deformity, fracture, and severe pain, leading to functional impairment and wheelchair confinement. So far there is no cure, as the underlying molecular and cellular mechanisms remain largely unknown and the lack of appropriate animal models has severely hampered FD research. Here we have investigated the cellular and molecular mechanisms underlying FD and tested its potential treatment by establishing a mouse model in which the human FD mutation (R201H) has been conditionally knocked into the corresponding mouse locus. We found that the germ-line FD mutant was embryonic lethal, and Cre-induced FD mutant expression in early osteochondral progenitors, osteoblast cells, or bone marrow stromal cells (BMSCs) recapitulated FD features. In addition, mosaic expression of FD mutant Gα in BMSCs induced bone marrow fibrosis both cell autonomously and non-cell autonomously. Furthermore, Wnt/β-catenin signaling was up-regulated in FD mutant mouse bone and BMSCs undergoing osteogenic differentiation, as we have found in FD human tissue previously. Reduction of Wnt/β-catenin signaling by removing one copy in an FD mutant line significantly rescued the phenotypes. We demonstrate that induced expression of the FD Gα mutant from the mouse endogenous locus exhibits human FD phenotypes in vivo, and that inhibitors of Wnt/β-catenin signaling may be repurposed for treating FD and other bone diseases caused by Gα activation.