Skeletal cells synthesize bone morphogenetic proteins (BMPs) and BMP antagonists. Gremlin, a BMP antagonist, is expressed in osteoblasts and opposes BMP effects on osteoblastic differentiation and function in vitro. However, its effects in vivo are not known. To investigate the actions of gremlin on bone remodeling in vivo, we generated transgenic mice overexpressing gremlin under the control of the osteocalcin promoter. Gremlin transgenics exhibited bone fractures and reduced bone mineral density by 20-30%, compared with controls. Static and dynamic histomorphometry of femurs revealed that gremlin overexpression caused reduced trabecular bone volume and the appearance of woven bone. Polarized light microscopy revealed disorganized collagen bundles at the endosteal cortical surface. Gremlin transgenic mice displayed a 70% decrease in the number of osteoblasts/trabecular area and reduced mineral apposition and bone formation rates. In vivo bromodeoxyuridine labeling and marrow stromal cell cultures demonstrated an inhibitory effect of gremlin on osteoblastic cell replication, but no change on apoptosis was detected. Marrow stromal cells from gremlin transgenics displayed a reduced response to BMP on phosphorylated mothers against decapentaplegic 1/5/8 phosphorylation and reduced free cytosolic beta-catenin levels. In conclusion, transgenic mice overexpressing gremlin in the bone microenvironment have decreased osteoblast number and function leading to osteopenia and spontaneous fractures.