Inactivating mutations of the “phosphate regulating gene with homologies to endopeptidases on the X chromosome” (PHEX/Phex) underlie disease in patients with X‐linked hypophosphatemia (XLH) and the hyp‐mouse, a murine homologue of the human disorder. Although increased serum fibroblast growth factor 23 (FGF‐23) underlies the HYP phenotype, the mechanism(s) by which PHEX mutations inhibit FGF‐23 degradation and/or enhance production remains unknown. Here we show that treatment of wild‐type mice with the proprotein convertase (PC) inhibitor, decanoyl‐Arg‐Val‐Lys‐Arg‐chloromethyl ketone (Dec), increases serum FGF‐23 and produces the HYP phenotype. Because PC2 is uniquely colocalized with PHEX in osteoblasts/bone, we examined if PC2 regulates PHEX‐dependent FGF‐23 cleavage and production. Transfection of murine osteoblasts with PC2 and its chaperone protein 7B2 cleaved FGF‐23, whereas Signe1 (7B2) RNA interference (RNAi) transfection, which limited 7B2 protein production, decreased FGF‐23 degradation and increased Fgf‐23 mRNA and protein. The mechanism by which decreased 7B2•PC2 activity influences Fgf‐23 mRNA was linked to reduced conversion of the precursor to bone morphogenetic protein 1 (proBMP1) to active BMP1, which resulted in limited cleavage of dentin matrix acidic phosphoprotein 1 (DMP1), and consequent increased Fgf‐23 mRNA. The significance of decreased 7B2•PC2 activity in XLH was confirmed by studies of hyp‐mouse bone, which revealed significantly decreased Sgne1 (7B2) mRNA and 7B2 protein, and limited cleavage of proPC2 to active PC2. The expected downstream effects of these changes included decreased FGF‐23 cleavage and increased FGF‐23 synthesis, secondary to decreased BMP1‐mediated degradation of DMP1. Subsequent Hexa‐D‐Arginine treatment of hyp‐mice enhanced bone 7B2•PC2 activity, normalized FGF‐23 degradation and production, and rescued the HYP phenotype. These data suggest that decreased PHEX‐dependent 7B2•PC2 activity is central to the pathogenesis of XLH. © 2013 American Society for Bone and Mineral Research