In vitro, topographical and biophysical cues arising from the extracellular matrix (ECM) direct skeletal stem cell (SSC) commitment and differentiation. However, the mechanisms by which the SSC-ECM interface is regulated and the outcome of such interactions on stem cell fate in vivo remain unknown. Here we demonstrate that conditional deletion of the membrane-anchored metalloproteinase MT1-MMP (Mmp14) in mesenchymal progenitors, but not in committed osteoblasts, redirects SSC fate decisions from osteogenesis to adipo- and chondrogenesis. By effecting ECM remodeling, MT1-MMP regulates stem cell shape, thereby activating a β1-integrin/RhoGTPase signaling cascade and triggering the nuclear localization of the transcriptional coactivators YAP and TAZ, which serve to control SSC lineage commitment. These data identify a critical MT1-MMP/integrin/YAP/TAZ axis operative in the stem cell niche that oversees SSC fate determination.