Fracture healing is a regenerative process that involves coordinated responses of many cell types, but characterization of the roles of specific cell populations in this process has been limited. We have identified alpha smooth muscle actin (αSMA) as a marker of a population of mesenchymal progenitor cells in the periosteum that contributes to osteochondral elements during fracture healing. Using a lineage tracing approach, we labeled αSMA-expressing cells, and characterized changes in the periosteal population during the early stages of fracture healing by histology, flow cytometry, and gene expression profiling. In response to fracture, the αSMA-labeled population expanded and began to differentiate toward the osteogenic and chondrogenic lineages. The frequency of mesenchymal progenitor cell markers such as Sca1 and PDGFRα increased after fracture. By 6 days after fracture, genes involved in matrix production and remodeling were elevated. In contrast, genes associated with muscle contraction and Notch signaling were downregulated after fracture. We confirmed that activating Notch signaling in αSMA-labeled cells inhibited differentiation into osteogenic and adipogenic lineages in vitro and ectopic bone formation in vivo. By characterizing changes in a selected αSMA-labeled progenitor cell population during fracture callus formation, we have shown that modulation of Notch signaling may determine osteogenic potential of αSMA-expressing progenitor cells during bone healing.