11beta-Hydroxysteroid dehydrogenase type 1 (11beta-HSD1) plays an important role in the prereceptor regulation of corticosteroids by locally converting cortisone into active cortisol. To investigate the impact of this mechanism on osteoblast development, we have characterized 11beta-HSD1 activity and regulation in a differentiating human osteoblast cell line (SV-HFO). Continuous treatment with the synthetic glucocorticoid dexamethasone induces differentiation of SV-HFO cells during 21 d of culture. Using this cell system, we showed an inverse relationship between 11beta-HSD1 activity and osteoblast differentiation. 11beta-HSD1 mRNA expression and activity were low and constant in differentiating osteoblasts. However, in the absence of differentiation (no dexamethasone), 11beta-HSD1 mRNA and activity increased strongly from d 12 of culture onward, with a peak around d 19. Promoter reporter studies provided evidence that specific regions of the 11beta-HSD1 gene are involved in this differentiation controlled regulation of the enzyme. Functional implication of these changes in 11beta-HSD1 is shown by the induction of osteoblast differentiation in the presence of cortisone. The current study demonstrates the presence of an intrinsic differentiation-driven molecular switch that controls expression and activity of 11beta-HSD1 and thereby cortisol production by human osteoblasts. This efficient mechanism by which osteoblasts generate cortisol in an autocrine fashion to ensure proper differentiation will help to understand the complex effects of cortisol on bone metabolism.