Sp3 is a ubiquitously expressed member of the Sp family of transcription factors. Recently, the mouse Sp3 gene has been disrupted by homologous recombination. Sp3 null mice die immediately after birth due to respiratory failure. In addition, these mice show a pronounced defect in late tooth formation. Here we show that Sp3 is also required for proper skeletal ossification. Both endochondral and intramembranous ossification are impaired in E18.5 Sp3-/- embryos. The delay in ossification is reflected by reduced expression of the osteoblast-specific marker gene osteocalcin. The transcription factor - core binding factor 1 (Cbfa1)--that is essential for bone formation, however, is expressed at normal levels. In vitro differentiation studies using Sp3-/- ES cells further support the conclusion that Sp3 is needed for correct bone formation. The capacity of Sp3-/- cells to undergo osteogenic differentiation in vitro is reduced and osteocalcin expression is significantly diminished. Our studies establish Sp3 as an essential transcription factor for late bone development.