Osteoporosis is a complex disease with various causes, such as estrogen loss, genetics, and aging. Here we show that a dominant‐negative form of aldehyde dehydrogenase 2 (ALDH2) protein, ALDH2*2, which is produced by a single nucleotide polymorphism (rs671), promotes osteoporosis due to impaired osteoblastogenesis. Aldh2 plays a role in alcohol‐detoxification by acetaldehyde‐detoxification; however, transgenic mice expressing Aldh2*2 (Aldh2*2 Tg) exhibited severe osteoporosis with increased levels of blood acetaldehyde without alcohol consumption, indicating that Aldh2 regulates physiological bone homeostasis. Wild‐type osteoblast differentiation was severely inhibited by exogenous acetaldehyde, and osteoblastic markers such as osteocalcin, runx2, and osterix expression, or phosphorylation of Smad1,5,8 induced by bone morphogenetic protein 2 (BMP2) was strongly altered by acetaldehyde. Acetaldehyde treatment also inhibits proliferation and induces apoptosis in osteoblasts. The Aldh2*2 transgene or acetaldehyde treatment induced accumulation of the lipid‐oxidant 4‐hydroxy‐2‐nonenal (4HNE) and expression of peroxisome proliferator‐activated receptor gamma (PPARγ), a transcription factor that promotes adipogenesis and inhibits osteoblastogenesis. Antioxidant treatment inhibited acetaldehyde‐induced proliferation‐loss, apoptosis, and PPARγ expression and restored osteoblastogenesis inhibited by acetaldehyde. Treatment with a PPARγ inhibitor also restored acetaldehyde‐mediated osteoblastogenesis inhibition. These results provide new insight into regulation of osteoporosis in a subset of individuals with ALDH2*2 and in alcoholic patients and suggest a novel strategy to promote bone formation in such osteopenic diseases. © 2012 American Society for Bone and Mineral Research.