We tested the hypothesis that the inhibitory effect of cortisol on bone growth is primarily on the periosteum. Fetal rat calvaria were maintained in organ culture, labeled with radioactive proline or thymidine, and then dissected to separate periosteum from the osteoblast-rich central bone. There was a dose- and time-dependent inhibition of thymidine incorporation into DNA in the periosteum which was significant at 24 h. These observations were further supported by decreases in the dry weight and DNA content of the periosteum at 96 h. Incorporation of thymidine and proline into the central bone were decreased only at 96 h. Pulse-chase studies using a high concentration of cortisol (10(-6) M) indicated that increased cell attrition may also play a role in the inhibitory effect of cortisol. We propose that the primary effect of cortisol on bone growth is an inhibition of proliferation of the periosteal cells which give rise to osteoblasts. The subsequent decrease in the incorporation of proline into the central bone may be the consequence of this inhibition.