Expression of the Wnt signaling inhibitor, DKK1 by multiple myeloma cells is correlated with lytic bone disease in multiple myeloma. However, the mechanism(s) by which DKK1 contributes to this process is not clear. Herein, we analyzed the functional role of canonical Wnt signaling and Dkk1 inhibition of this pathway in bone morphogenic protein (BMP)-2-induced osteoblast differentiation. Osteoblast differentiation was measured by alkaline phosphatase (ALP) activity in murine (C2C12) and human pre-osteoblast (hFOB1.19) and osteoblast-like (Saos-2 and MG63) cell lines. Cytoplasmic beta-catenin protein was separated by E-cadherin-GST pull-down assay and analyzed by Western blotting. A dominant negative form of beta-catenin, Dkk1 and TCF reporter constructs were transfected into C2C12 cells. C2C12 cells were also transfected with siRNA specific to LRP5/6 to knockdown receptor expression. Canonical Wnt signaling was activated in these cell lines in response to Wnt3a as assessed by increased cytoplasmic, non-phosphorylated beta-catenin and TCF/LEF transcription activity. Recombinant Dkk1 and plasma from MM patients containing high levels of Dkk1 blocked Wnt3a-induced beta-catenin accumulation. Importantly, Dkk1 abrogated BMP-2 mediated osteoblast differentiation. The requirement for Wnt signaling in osteoblast differentiation was confirmed by the following observations: 1) overexpression of Dkk1 decreased endogenous beta-catenin and ALP activity; 2) silencing of Wnt receptor mRNAs blocked ALP activity; and 3) a dominant negative form of beta-catenin eliminated BMP-2-induced ALP activity. Furthermore, Wnt3a did not increase ALP activity nor did BMP-2 treatment result in beta-catenin stabilization indicating that cooperation between these two pathways is required, but they are not co-regulated by either ligand. These studies have revealed that autocrine Wnt signaling in osteoblasts is necessary to promote BMP-2-mediated differentiation of pre-osteoblast cells, while Wnt signaling alone is not capable of inducing such differentiation. Dkk1 inhibits this process and may be a key factor regulating pre-osteoblast differentiation and myeloma bone disease.