Like other tissue injuries, bone fracture triggers an inflammatory response, which plays an important role in skeletal repair. Inflammation is believed to have both positive and negative effects on bone repair, but the underlying cellular mechanisms are not well understood. To assess the role of inflammation on skeletal cell differentiation, we used mouse models of fracture repair that stimulate either intramembranous or endochondral ossification. In the first model, fractures are rigidly stabilized leading to direct bone formation, while in the second model, fracture instability causes cartilage and bone formation. We compared the inflammatory response in these two mechanical environments and found changes in the expression patterns of inflammatory genes and in the recruitment of inflammatory cells and osteoclasts. These results suggested that the inflammatory response could influence skeletal cell differentiation after fracture. We then exploited matrix metalloproteinase 9 (MMP9) that is expressed in inflammatory cells and osteoclasts, and which we previously showed is a potential regulator of cell fate decisions during fracture repair. Mmp9(-/-) mice heal stabilized fractures via endochondral ossification, while wild type mice heal via intramembranous ossification. In parallel, we observed increases in macrophages and T cells in the callus of Mmp9(-/-) compared to wild type mice. To assess the link between the profile of inflammatory cells and skeletal cell fate functionally, we transplanted Mmp9(-/-) mice with wild type bone marrow, to reconstitute a wild type hematopoietic lineage in interaction with the Mmp9(-/-) stroma and periosteum. Following transplantation, Mmp9(-/-) mice healed stabilized fractures via intramembranous ossification and exhibited a normal profile of inflammatory cells. Moreover, Mmp9(-/-) periosteal grafts healed via intramembranous ossification in wild type hosts, but healed via endochondral ossification in Mmp9(-/-) hosts. We observed that macrophages accumulated at the periosteal surface in Mmp9(-/-) mice, suggesting that cell differentiation in the periosteum is influenced by factors such as BMP2 that are produced locally by inflammatory cells. Taken together, these results show that MMP9 mediates indirect effects on skeletal cell differentiation by regulating the inflammatory response and the distribution of inflammatory cells, leading to the local regulation of periosteal cell differentiation.