Osteoinductive factor (OIF) is a glycoprotein in bone that induces ectopic bone formation. Implantation of OIF plus transforming growth factor beta (TGF-beta) type 1 or 2 into subcutaneous tissues of rats induces formation of bone at the implantation site. Since TGF-beta is also present in bone matrix and inhibits formation of multinucleated cells that express an osteoclast phenotype in long-term human marrow cultures, we tested the effects of OIF on formation of these osteoclast-like cells to determine the effects of OIF on cells in the osteoclast lineage. We found that OIF inhibited total multinucleated cell (MNC) formation in a dose-dependent fashion and preferentially inhibited formation of MNCs that react with monoclonal antibody 23c6 (23c6-positive MNCs), an antibody that identifies osteoclasts. In addition, low concentrations of OIF in combination with low concentrations of TGF-beta acted synergistically to inhibit 23c6-positive MNC formation. The inhibition of 23c6-positive MNC formation by OIF was not mediated by prostaglandin synthesis. These data suggest that regulatory growth factors, such as OIF or TGF-beta, that are stored within the bone matrix and released when bone is resorbed can serve as natural inhibitors of osteoclast activity by inhibiting osteoclast formation.