Postmenopausal loss of 17 beta-estradiol (E2) in women is associated with decreased bone mineral density and increased susceptibility to osteoporotic bone fracture. These changes in bone status are assumed to be due to circulating levels of the hormone; therapeutic replacement of E2 can alleviate the bone disease. However, recent reports have shown that human osteoblastic (OB) cells are able to synthesize estrogens locally, via expression of the enzyme aromatase. In this study, we have characterized the expression and activity of aromatase and 17 beta-hydroxysteroid dehydrogenase (17 beta-HSD) in rat OB cell lines. Aromatase activity in ROS 17/2.8, ROS 25/1, and UMR 106 cells was similar to that shown in human OB cells, with the highest levels of activity observed in the more differentiated ROS 17/2.8 cells (Vmax = 45 pmol/h/mg of protein). The rat OB cells also showed 17 beta-HSD activity, with the predominant metabolism in all three cell lines being estrone (E1) to E2. As with aromatase, the highest activity was observed in ROS 17/2.8 cells (Vmax = 800 pmol/h/mg of protein). Northern analyses indicated the variable presence of transcripts corresponding to the type 1, 2, 3, and 4 isoforms of 17 beta-HSD. Further analysis of androstenedione metabolism indicated that the net effect of aromatase and 17 beta-HSD activity varied with cell type and culture treatment. All three OB cell lines were able to synthesize E1, E2, and testosterone from androstenedione, although activity varied between OB cell types. Regulatory effects were observed with 1,25-dihydroxyvitamin D3 (positive) and dexamethasone (negative). These data suggest that local synthesis of sex hormones is an important function of OB cells and may play a key role in the modulation of bone turnover independent of circulating hormone concentrations.