Bone fracture ruptures blood vessels and disrupts the bone marrow, the site of new red blood cell production (erythropoiesis). Current dogma holds that bone fracture causes severe hypoxia at the fracture site, due to vascular rupture, and that this hypoxia must be overcome for regeneration. Here, we show that the early fracture site is not hypoxic, but instead exhibits high oxygen tension (> 55 mmHg, or 8%), similar to the red blood cell reservoir, the spleen. This elevated oxygen stems not from angiogenesis but from activated erythropoiesis in the adjacent bone marrow. Fracture-activated erythroid progenitor cells concentrate oxygen through haemoglobin formation. Blocking transferrin receptor 1 (CD71)-mediated iron uptake prevents oxygen binding by these cells, induces fracture site hypoxia, and enhances bone repair through increased angiogenesis and osteogenesis. These findings upend our current understanding of the early phase of bone fracture repair, provide a mechanism for high oxygen tension in the bone marrow after injury, and reveal an unexpected and targetable role of erythroid progenitors in fracture repair.