To identify the molecular mechanism by which insulin-like growth factor binding protein-4 (IGFBP-4) exerts its inhibitory effects on insulin-like growth factor (IGF) actions, we localized and determined the role of the IGF binding domain in modulating IGF actions in human osteoblasts. Deletion analysis using IGFBP-4 expressed in bacteria revealed that the N-terminal sequence Leu72-Ser91 was essential for IGF binding. The C-terminal fragments (His121-Glu237 or Arg142-Glu237) did not bind to IGF but loss of these regions decreased IGF binding activity. Detailed deletion analysis identified the residues Cys205-Val214 as the motif to facilitate IGF binding. Mitogenic studies revealed that an IGFBP-4 mutant (His74 replaced by Pro74) and an N-terminal peptide (N terminus to Thr71) with little IGF binding activity failed to inhibit IGF-II-induced human osteoblast proliferation. An N-terminal peptide (N terminus to Asn182) with reduced IGF binding activity inhibited IGF action but with lower potency. In contrast, an IGFBP-4 mutant (His74 replaced with Ala74) exhibited similar IGF binding activity and potency in inhibiting the activity of IGF-II compared with the wild type. Therefore, the N-terminal sequence (Leu72-Ser91) and the C-terminal sequence (Cys205-Val214) are necessary to form the high affinity IGF binding domain, which is the major structural determinant of the IGFBP-4 function.