Twisted gastrulation (Tsg) is a secreted glycoprotein that binds bone morphogenetic protein-2 (BMP-2) and BMP-4 and can display both BMP agonist and antagonist functions. Tsg acts as a BMP agonist in chondrocytes, but its expression and actions on the differentiation of cells of the osteoblastic lineage are not known. We investigated the effects of Tsg overexpression by transducing murine ST-2 stromal and MC3T3 cells with a retroviral vector where Tsg is under control of the cytomegalovirus promoter and compared them to cells transduced with the parental vector alone. ST-2 cells were cultured in osteoblastic differentiating conditions in the presence or absence of BMP-2. Tsg overexpression precluded the appearance of mineralized nodules induced by BMP-2, led to a delay in the expression of osteoblastic gene markers, and decreased the responsiveness of ST-2 differentiating cells to PTH. BMP-2 induced the phosphorylation of signaling mothers against decapentaplegic-1/5/8, but not ERK, c-Jun N-terminal kinase, and p38. ST-2 cells overexpressing Tsg displayed an inhibition of BMP/signaling mother against decapentaplegic signaling. Tsg action was specific to BMP, because Tsg overexpression did not affect TGF-beta or Wnt/beta-catenin signaling pathways. Tsg also opposed MC3T3 cell differentiation and the expression of a mature osteoblast phenotype. In conclusion, Tsg overexpression inhibits BMP action in stromal and preosteoblastic cells and, accordingly, arrests their differentiation toward the osteoblastic pathway.