The farnesoid X receptor (FXR) is a ligand-activated transcription factor belonging to the nuclear receptor superfamily. FXR is mainly expressed in liver and small intestine, where it plays an important role in bile acid, lipid, and glucose metabolism. The kidney also has a high FXR expression level, with its physiological function unknown. Here we demonstrate that FXR is ubiquitously distributed in renal tubules. FXR agonist treatment significantly lowered urine volume and increased urine osmolality, whereas FXR knockout mice exhibited an impaired urine concentrating ability, which led to a polyuria phenotype. We further found that treatment of C57BL/6 mice with chenodeoxycholic acid, an FXR endogenous ligand, significantly up-regulated renal aquaporin 2 (AQP2) expression, whereas FXR gene deficiency markedly reduced AQP2 expression levels in the kidney. In vitro studies showed that the AQP2 gene promoter contained a putative FXR response element site, which can be bound and activated by FXR, resulting in a significant increase of AQP2 transcription in cultured primary inner medullary collecting duct cells. In conclusion, the present study demonstrates that FXR plays a critical role in the regulation of urine volume, and its activation increases urinary concentrating capacity mainly via up-regulating its target gene AQP2 expression in the collecting ducts.