Cathepsin K (CTSK) is secreted by osteoclasts to degrade collagen and other matrix proteins during bone resorption. Global deletion of Ctsk in mice decreases bone resorption, leading to osteopetrosis, but also increases the bone formation rate (BFR). To understand how Ctsk deletion increases the BFR, we generated osteoclast- and osteoblast-targeted Ctsk knockout mice using floxed Ctsk alleles. Targeted ablation of Ctsk in hematopoietic cells, or specifically in osteoclasts and cells of the monocyte-osteoclast lineage, resulted in increased bone volume and BFR as well as osteoclast and osteoblast numbers. In contrast, targeted deletion of Ctsk in osteoblasts had no effect on bone resorption or BFR, demonstrating that the increased BFR is osteoclast dependent. Deletion of Ctsk in osteoclasts increased their sphingosine kinase 1 (Sphk1) expression. Conditioned media from Ctsk-deficient osteoclasts, which contained elevated levels of sphingosine-1-phosphate (S1P), increased alkaline phosphatase and mineralized nodules in osteoblast cultures. An S1P_1,3 receptor antagonist inhibited these responses. Osteoblasts derived from mice with Ctsk-deficient osteoclasts had an increased RANKL/OPG ratio, providing a positive feedback loop that increased the number of osteoclasts. Our data provide genetic evidence that deletion of CTSK in osteoclasts enhances bone formation in vivo by increasing the generation of osteoclast-derived S1P.