Although best known for its role in T lymphocyte activation, the calcineurin/nuclear factor of activated T cells (NFAT) signaling pathway is also known to be involved in a wide range of other biological responses in a variety of different cell types. Here we have investigated the role of the calcineurin/NFAT signaling pathway in the regulation of osteoclast differentiation. Osteoclasts are bone-resorbing multinucleated cells that are derived from the monocyte/macrophage cell lineage after stimulation with a member of the tumor necrosis factor family of ligands known as receptor activator of nuclear factor-kappaB ligand (RANKL). We now report that inhibition of calcineurin with either the immunosuppressant drugs cyclosporin A and FK506, or the retrovirally mediated ectopic expression of a specific calcineurin inhibitory peptide, all potently inhibit the RANKL-induced differentiation of the RAW264.7 monocyte/macrophage cell line into mature multinucleated osteoclasts. In addition, we find that NFAT family members are expressed in RAW264.7 cells and that their expression is up-regulated in response to RANKL stimulation. Most importantly, we find that ectopic expression of a constitutively active, calcineurin-independent NFATc1 mutant in RAW264.7 cells is sufficient to induce these cells to express an osteoclast-specific pattern of gene expression and differentiate into morphologically distinct, multinucleated osteoclasts capable of inducing the resorption of a physiological mineralized matrix substrate. Taken together, these data define calcineurin as an essential downstream effector of the RANKL-induced signal transduction pathway leading toward the induction of osteoclast differentiation and furthermore, indicate that the activation of the NFATc1 transcription factor is sufficient to initiate a genetic program that results in the specification of the mature functional osteoclast cell phenotype.