Bone is a dynamic environment where cells sense and adapt to changes in nutrient and oxygen availability. Conditions associated with hypoxia in bone are also associated with bone loss. In vitro hypoxia (2% oxygen) alters gene expression in osteoblasts and osteocytes and induces cellular changes including the upregulation of hypoxia inducible factor (HIF) levels. Our studies show that osteoblasts respond to hypoxia (2% oxygen) by enhancing expression of genes associated with adipocyte/lipogenesis phenotype (C/EBPβ, PPARγ2, and aP2) and by suppressing expression of genes associated with osteoblast differentiation (alkaline phosphatase, AP). Hypoxia increased HIF protein levels, hypoxic response element (HRE) binding, and HRE-reporter activity. We also demonstrate that prolyl-hydroxylases 2 and 3 (PHD2, PHD3), one of the major factors coordinating HIF degradation under normoxic but not hypoxic conditions, are induced in osteoblasts under hypoxic conditions. To further determine the contribution of PHDs and upregulated HIF activity in modulating osteoblast phenotype, we treated osteoblasts with a PHD inhibitor, dimethyloxaloylglycine (DMOG), and maintained cells under normoxic conditions. Similar to hypoxic conditions, HRE reporter activity was increased and adipogenic gene expression was increased while osteoblastic genes were suppressed. Taken together, our findings indicate a role for PHDs and HIFs in the regulation of osteoblast phenotype. J. Cell. Biochem. 100: 762–772, 2007. © 2006 Wiley-Liss, Inc.