Osteoclast (OCL) activity is controlled by local factors produced in the bone microenvironment. We previously identified a novel inhibitor of OCL formation that is produced by OCLs (osteoclast inhibitory peptide-1/human Sca [OIP-1/hSca]). OIP-1/hSca is a glycosylphosphatidylinositol (GPI)-linked membrane protein (16 kDa) that is cleaved from the OCL surface. Immunocytochemical staining further confirmed the expression of OIP-1/hSca in OCL formed in mouse bone marrow cultures. However, the structure/function mechanisms responsible for the inhibitory effects of OIP-1/hSca on OCL formation are unknown. Therefore, we expressed deletion mutants of OIP-1 in 293 cells and tested their effects on OCL formation. These studies indicated that the carboxy-terminal peptide (c-peptide) region is critical for OIP-1/hSca activity. A 33 amino acid OIP-1 c-peptide (10-100 ng/ml) significantly inhibited 1,25-dihydroxyvitamin D3 [1,25(OH)2D3] induced OCL formation and pit formation capacity of OCL on dentine slices in human bone marrow cultures. Furthermore, the c-peptide (10-100 ng/ml) significantly inhibited early human OCL precursor (granulocyte-macrophage colony-forming unit [GM-CFU]) colony formation in methylcellulose cultures. The polyclonal antibody against the OIP-1 c-peptide neutralized the inhibitory effect of OIP-1 c-peptide on OCL formation in mouse bone marrow cultures in vitro. These results show that the OIP-1 c-peptide is the functional domain of OIP-1 and that availability of neutralizing antibody specific to the OIP-1 c-peptide should provide important mechanistic insights into OIP-1/hSca inhibition of osteoclastogenesis in the bone microenvironment.