Bone remodeling depends upon proper osteoblast and osteoclast function. Bone morphogenetic protein-2 (BMP-2) stimulates differentiation of osteoblasts from pluripotent precursors. Osteoclast formation depends on the concerted action of osteoblast-derived RANKL and colony stimulating factor-1 (CSF-1). BMP-2 stimulates RANKL expression. However the effect of BMP-2 on CSF-1 expression has not been studied. We investigated the role of BMP-2 in CSF-1 expression in osteogenic C2C12 cells. Incubation of C2C12 cells with BMP-2 supported osteoclastogenesis of spleen cells with concomitant increase in expression of CSF-1 mRNA and protein. To determine the mechanism, we identified a BMP-responsive element (BRE) between -627 bp and -509 bp in the CSF-1 promoter. DNase I footprint analysis revealed the presence of consensus Smad binding motif in this region. Electrophoretic mobility shift assay showed BMP-2-stimulated binding of proteins to this motif. Mutation of core sequence as well as its 5' and 3' flanking sequences abolished the DNA-protein interaction resulting in inhibition of CSF-1 transcription. Supershift analysis detects the presence of Smad 1, Smad 5, Smad 4 and the transcriptional co-activator CBP in the BRE-protein complex. In addition, Smad 1 and Smad 5 alone or in combination with Smad 4 increased CSF-1 transcription. Furthermore, CBP markedly increased transcription of CSF-1. These data represent the first evidence that BMP-2 increases the osteoclastogenic CSF-1 expression by a transcriptional mechanism using the canonical Smad pathway and provide a mechanism for BMP-2-induced osteoclast differentiation.