R2R3-MYB transcription factors function as the master regulators of the phenylpropanoid pathway in which both lignin and anthocyanin are produced. In poplar, R2R3-MYB transcription factor PdMYB118 positively regulates anthocyanin production to change leaf color. However, the molecular mechanism by which it controls different branches of the phenylpropanoid pathway still remains poorly understood. Here, we reported that in addition to anthocyanin synthesis, lignin deposition and xylem differentiation were regulated by PdMYB118 through inhibiting PagKNAT2/6b gene expression. The transgenic poplar plants overexpressing PdMYB118 accumulated more xylem, lignin and anthocyanin. Transcriptome and reverse transcription quantitative PCR analyses revealed that the expression of PagKNAT2/6b gene which inhibited lignin deposition and xylem differentiation was significantly down-regulated in transgenic poplar plants. Subsequent dual-luciferase reporter and yeast-one-hybrid assays demonstrated that PdMYB118 directly inhibited the transcription of PagKNAT2/6b by binding to the AC elements in its promoter region. Further experiments with transgenic poplar plants overexpressing PagKNAT2/6b demonstrated that overexpression of PagKNAT2/6b in the PdMYB118 overexpression background rescued lignin accumulation and xylem width to the same level of wild type plants. The findings in this work suggest that PdMYB118 is involved in the lignin deposition and xylem differentiation via modulating the expression of PagKNAT2/6b, and the PdMYB118- PagKNAT2/6b model can be used for the genetic breeding of new woody tree with high lignin production.