Targeted disruption of Axin2 in mice induces skeletal defects, a phenotype resembling craniosynostosis in humans. Premature fusion of cranial sutures, caused by deficiency in intramembranous ossification, occurs at early postnatal stages. Axin2 negatively regulates both expansion of osteoprogenitors and maturation of osteoblasts through its modulation on Wnt/beta-catenin signaling. We investigate the dual role of beta-catenin to gain further insights into the skull morphogenetic circuitry. We show that as a transcriptional co-activator, beta-catenin promotes cell division by stimulating its target cyclin D1 in osteoprogenitors. Upon differentiation of osteoprogenitors, BMP signaling is elevated to accelerate the process in a positive feedback mechanism. This Wnt-dependent BMP signal dictates cellular distribution of beta-catenin. As an adhesion molecule, beta-catenin promotes cell-cell interaction mediated by adherens junctions in mature osteoblasts. Finally, haploid deficiency of beta-catenin alleviates the Axin2-null skeletal phenotypes. These findings support a model for disparate roles of beta-catenin in osteoblast proliferation and differentiation.