While studies of the adaptor SH3BP2 have implicated a role in receptor-mediated signaling in mast cells and lymphocytes, they have failed to identify its function or explain why SH3BP2 missense mutations cause bone loss and inflammation in patients with cherubism. We demonstrate that Sh3bp2 "cherubism" mice exhibit trabecular bone loss, TNF-α-dependent systemic inflammation, and cortical bone erosion. The mutant phenotype is lymphocyte independent and can be transferred to mice carrying wild-type Sh3bp2 alleles through mutant fetal liver cells. Mutant myeloid cells show increased responses to M-CSF and RANKL stimulation, and, through mechanisms of increased ERK 1/2 and SYK phosphorylation/activation, they form macrophages that express high levels of TNF-α and osteoclasts that are unusually large. M-CSF and RANKL stimulation of myeloid cells that overexpress wild-type SH3BP2 results in similar large osteoclasts. This indicates that the mutant phenotype reflects gain of SH3BP2 function and suggests that SH3BP2 is a critical regulator of myeloid cell responses to M-CSF and RANKL stimulation.