The transforming growth factor-beta (TGF-beta) superfamily is a group of secreted growth factors that appears to play a central role in mesenchymal differentiation, including cartilage and bone formation. The present study examines the role of one member of this family, vgr-1, also called bone morphogenetic protein-6, in mesenchymal cell differentiation. This factor may be considered as a prototype for the largest subgroup of related factors within the TGF-beta superfamily, the function of which has as yet been poorly defined. vgr-1 has been localized previously to hypertrophic cartilage and has been shown to induce endochondral bone formation in vivo. To further characterize the role of vgr-1 in bone and cartilage differentiation, we stably transfected the pluripotent mesenchymal cell line ROB-C26 with a vector to overexpress vgr-1. Overexpression of this factor did not affect cell shape or morphology, but it enhanced osteoblastic differentiation in vitro and altered cellular responsiveness to retinoic acid. Furthermore, the extracellular matrix produced by these vgr-1-overexpressing cells induced ectopic bone formation in vivo and osteoblastic differentiation in vitro, similar to the matrix produced by C26 cells treated with retinoic acid. The osteoinductive effect of the matrix from vgr-1-overexpressing cells was blocked using a neutralizing vgr-1 antibody but not with a neutralizing TGF-beta 1 antibody, indicating that vgr-1 alone was required for this osteogenic effect. In contrast, the osteoinductive effect of matrix from retinoic acid-treated cells was blocked with both vgr-1 and TGF-beta 1 antibodies, suggesting that TGF-beta 1 may act prior to vgr-1 during osteoblastic differentiation. We further demonstrated that osteoinduction by vgr-1 was dependent on presentation of vgr-1 within the matrix, because the osteoinductive effect of matrix from vgr-1-overexpressing cells could not be mimicked with the addition of soluble vgr-1 to parental C26 cells. Finally, overexpression of MyoD within the C26 cells overexpressing vgr-1 converted the cells to myoblasts, indicating that vgr-1 had induced early osteoblastic.