Glucocorticoids can promote osteoblast differentiation from fetal calvarial cells and bone marrow stromal cells. We recently reported that glucocorticoid specifically induced bone morphogenetic protein-6 (BMP-6), a glycoprotein signaling molecule that is a multifunctional regulator of vertebrate development. In the present study, we used fetal rat secondary calvarial cultures to determine genes induced during early osteoblast differentiation as initiated by glucocorticoid treatment. Glucocorticoid, and subsequently BMP-6, was found to induce a novel rat intracellular protein, LIM mineralization protein-1 (LMP-1), that in turn resulted in synthesis of one or more soluble factors that could induce de novo bone formation. Blocking expression of LMP-1 using antisense oligonucleotide prevented osteoblast differentiation in vitro. Overexpression of LMP-1 using a mammalian expression vector was sufficient to initiate de novo bone nodule formation in vitro and in sc implants in vivo. These data demonstrate that LMP-1 is an essential positive regulator of the osteoblast differentiation program as well as an important intermediate step in the BMP-6 signaling pathway.