Adult vertebrates require a continuous supply of osteoblasts for both bone remodeling and regeneration during fracture repair. This implies the existence of a reservoir of cells in the body capable of osteogenesis. One source of these osteoprogenitors is the stem cells within the fibroblastic component of bone marrow stroma. Mature osteoblasts are characterized by high alkaline phosphatase and osteopontin levels, combined with expression of the bone-specific matrix proteins osteocalcin and bone sialoprotein and the capacity for matrix mineralization. We have used these markers to define the conditions permitting rapid osteoblast differentiation from cultured bone marrow stromal cells. Osteoblastic differentiation was induced by continuous culture with 10(-8) M dexamethasone (dex) which stimulated alkaline phosphatase (AP) activity and mRNA levels as well as osteopontin, bone sialoprotein, and osteocalcin mRNA by Day 8 of culture; coaddition of 10(-8) M 1,25-dihydroxyvitamin D3 (vitamin D) with dex was essential for high osteocalcin mRNA expression. Recombinant bone morphogenetic protein-2 (BMP-2) exerted similar effects to dex and acted in synergy with dex to yield greatly elevated AP activity as well as increased levels of osteoblastic mRNAs. Using in situ hybridization to detect the presence of mRNAs in individual cells, it was shown that appearance of osteopontin mRNA preceded AP mRNA, and was expressed in dex-treated cell colonies as early as Day 4. Quantitation of cell surface AP protein by flow cytometry indicated that culture with dex or BMP-2 produced a mixed population of cells with low AP (dim cells) and cells with high AP levels, while the combination of dex + BMP-2 yielded very few dim cells and a population of cells containing higher AP levels than with either inducer alone. When the dim population from dex-treated cells was sorted and recultured with inducers, these cultures developed high AP levels and were able to deposit a mineralized matrix. Thus, treatment of marrow stromal cells with inducer results in a population of mature osteoblasts as well as a population of undifferentiated cells which retains the capacity for osteoblastic differentiation with further exposure to inducers. These data demonstrate that stem cells within the stromal compartment of bone marrow are capable of rapidly acquiring osteoblast features and suggest a potential role for glucocorticoids in combination with BMP-2 and vitamin D in stages of osteogenic development.