Canonical Wnt (cWnt) signaling through β-catenin regulates osteoblast proliferation and differentiation to enhance bone formation. We previously reported that osteogenic action of β-catenin is dependent on BMP signaling. Here, we further examined interactions between cWnt and BMP in bone. In osteoprogenitors stimulated with BMP2, β-catenin localizes to the nucleus, physically interacts with Smad4, and is recruited to DNA-binding transcription complexes containing Smad4, R-Smad1/5 and TCF4. Furthermore, Tcf/Lef-dependent transcription, Ccnd1 expression and proliferation all increase when Smad4, 1 or 5 levels are low, whereas TCF/Lef activities decrease when Smad4 expression is high. The ability of Smad4 to antagonize transcription of Ccnd1 is dependent on DNA-binding activity but Smad4-dependent transcription is not required. In mice, conditional deletion of Smad4 in osterix(+) cells increases mitosis of cells on trabecular bone surfaces as well as in primary osteoblast cultures from adult bone marrow and neonatal calvaria. By contrast, ablation of Smad4 delays differentiation and matrix mineralization by primary osteoblasts in response to Wnt3a, indicating that loss of Smad4 perturbs the balance between proliferation and differentiation in osteoprogenitors. We propose that Smad4 and Tcf/Lef transcription complexes compete for β-catenin, thus restraining cWnt-dependent proliferative signals while favoring the matrix synthesizing activity of osteoblasts.