We tested the hypothesis that induction of cyclo-oxygenase (COX) 2 mediates some effects of bone morphogenetic protein (BMP) 2 on bone. BMP-2 induced COX-2 mRNA and prostaglandin (PG) production in cultured osteoblasts. BMP-2 increased luciferase activity in calvarial osteoblasts from mice transgenic for a COX-2 promoter-luciferase reporter construct (Pluc) and in MC3T3-E1 cells transfected with Pluc. Deletion analysis identified the -300/-213-bp region of the COX-2 promoter as necessary for BMP-2 stimulation of luciferase activity. Mutation of core-binding factor activity 1 (muCbfa1) consensus sequence (5′-AACCACA-3′) at -267/-261 bp decreased BMP-2 stimulation of luciferase activity by 82%. Binding of nuclear proteins to an oligonucleotide spanning the Cbfa1 site was inhibited or supershifted by specific antibodies to Cbfa1. In cultured osteoblasts from calvariae of COX-2 knockout (-/-) and wild-type (+/+) mice, the absence of COX-2 expression reduced the BMP-2 stimulation of both ALP activity and osteocalcin mRNA expression. In cultured marrow cells flushed from long bones, BMP-2 induced osteoclast formation in cells from COX-2+/+ mice but not in cells from COX-2−/− mice. In vivo, BMP-2 (10 μg/pellet) induced mineralization in pellets of lyophilized collagen implanted in the flanks of mice. Mineralization of pellets, measured by microcomputed tomography (μCT), was decreased by 78% in COX-2−/− mice compared with COX-2+/+ mice. We conclude that BMP-2 transcriptionally induces COX-2 in osteoblasts via a Cbfa1 binding site and that the BMP-2 induction of COX-2 can contribute to effects of BMP-2 on osteoblastic differentiation and osteoclast formation in vitro and to the BMP-2 stimulation of ectopic bone formation in vivo.