The roles of Sonic hedgehog (Shh) and Bone morphogenetic protein-2 (Bmp-2) in osteoblast differentiation were investigated using in vitro cell systems. Recombinant amino-terminal portion of SHH (rSHH-N) dose dependently stimulated ALP activity in C3H10T1/2 and MC3T3-E1 cells. rSHH-N induced expression of Osteocalcin mRNA in C3H10T1/2 cells. A soluble form of the receptor for type IA BMP receptor antagonized rSHH-N-induced ALP activity in C3H10T1/2 and MC3T3-E1 cells, indicating that BMPs are involved in SHH-induced osteoblast differentiation. Simultaneous supplement with rSHH-N and BMP-2 synergistically induced ALP activity and expression of Osteocalcin mRNA in C3H10T1/2 cells. Pretreatment with rSHH-N for 6 h enhanced the response to BMP-2 by increasing ALP activity in C3H10T1/2 and MC3T3-E1 cells. Stimulatory effects of rSHH-N and additive effects with rSHH-N and BMP-2 on ALP activity were also observed in mouse primary osteoblastic cells. Transplantation of BMP-2 (1 microg) into muscle of mice induced formation of ectopic bone, whereas transplantation of r-SHH-N (1-5 microg) failed to generate it. These results indicate that Shh plays important roles in osteoblast differentiation by cooperating with BMP.