Indole acetic acid (auxin) is a key regulator of wood formation, and an observed overlap between auxin concentration gradient and developing secondary xylem cells has led to the hypothesis that auxin regulates wood formation by acting as a morphogen. We dissected the role of auxin in wood formation by identifying the auxin-responsive transcriptome in wood-forming tissues and investigating alterations in wood formation in transgenic hybrid aspen plants (Populus tremula x Populus tremuloides) with perturbed auxin signaling. We showed that auxin-responsive genes in wood-forming tissues respond dynamically to changes in cellular auxin levels. However, the expression patterns of most of the auxin-responsive genes displayed limited correlation with the auxin concentration across this developmental zone. Perturbing auxin signaling by reducing auxin responsiveness reduced the cambial cell division activity, caused spatial deregulation of cell division of the cambial initials, and led to reductions in not only radial but also axial dimensions of fibers and vessels. We propose that, instead of acting as a morphogen, changes in auxin concentration in developing secondary xylem cells may provide important regulatory cues that modulate the expression of a few key regulators; these, in turn, may control the global gene expression patterns that are essential for normal secondary xylem development.