Insulin-like growth factor binding protein 4 (IGFBP-4) is abundantly expressed in bone and is generally believed to function as an inhibitor of IGF action. To investigate the function of locally produced IGFBP-4 in bone in vivo, we targeted expression of IGFBP-4 to osteoblasts using a human osteocalcin promoter to direct transgene expression. IGFBP-4 protein levels in calvaria of transgenic (OC-BP4) mice as measured by Western ligand blot were increased 25-fold over the endogenous level. Interestingly, levels of IGFBP-5 were decreased in the OC-BP4 mice, possibly because of a compensatory alteration in IGF-1 action. Morphometric measurements showed a decrease in femoral length and total bone volume in transgenic animals compared with the controls. Quantitative histomorphometry at the distal femur disclosed a striking reduction in bone turnover in the OC-BP4 mice. Osteoblast number/bone length and bone formation rate/bone surface in OC-BP4 mice were approximately one-half that seen in control mice. At birth, OC-BP4 mice were of normal size and weight but exhibited striking postnatal growth retardation. Organ allometry (mg/g body weight) analysis revealed that, whereas most organs exhibited a proportional reduction in weight, calvarial and femoral wet weights were disproportionally small (approximately 70% and 80% of control, respectively). In conclusion, paracrine overexpression of IGFBP-4 in the bone microenvironment markedly reduced cancellous bone formation and turnover and severely impaired overall postnatal skeletal and somatic growth. We attribute these effects to the sequestration of IGF-1 by IGFBP-4 and consequent impairment of IGF-1 action in skeletal tissue.