Bone morphogenetic proteins (BMPs) are required for normal postnatal bone formation and osteoblast differentiation. There is evidence from recent studies that BMP signaling in osteoblasts is controlled by an ubiquitin-proteasome regulatory mechanism involving a cascade of enzymatic reactions. The specificity of protein ubiquitination is determined by E3 ubiquitin ligases, which play a crucial role in defining substrate specificity and subsequent protein degradation by 26S proteasomes. We have examined the role of the E3 ubiquitin ligase Smad ubiquitin regulatory factor 1 (Smurf1), a member of the Hect domain family of E3 ubiquitin ligases in osteoblast function. Smurf1 has been found to interact with BMP-activated Smad1 and -5 and to mediate degradation of these Smad proteins. Recently we have found that Smurf1 mediates the protein degradation of the osteoblast-specific transcription factor Runx2/Cbfa1. To determine the role of Smurf1 in osteoblast differentiation, in the present studies we transfected a Smurf1 expression plasmid into 2T3 osteoblast precursor cells and found that Smurf1 overexpression inhibits BMP signaling and osteoblast differentiation. To further investigate the role of Smurf1 in bone formation in vivo, we generated transgenic mice in which expression of the epitope-tagged Smurf1 transgene was targeted to osteoblasts using the murine 2.3-kb osteoblast-specific type I collagen promoter. In these transgenic mice, bone formation was significantly reduced during postnatal life. Our results demonstrate for the first time that Smurf1 plays a specific role in osteoblast differentiation and bone formation in vivo.