Bone morphogenetic protein 2 (BMP-2) plays a decisive role during bone regeneration and repair as well as during various stages of embryonal development. A cDNA encoding mature human BMP-2 could be efficiently expressed in Escherichia coli, and after renaturation a dimeric BMP-2 protein of M(r) 26,000 was prepared with a purity greater 98%. The recombinant BMP-2 was functionally active as demonstrated by the induction of alkaline phosphatase activity in the C3H10T1/2 fibroblast cell line (EC50 of 70 nM) and proteoglycan synthesis in embryonic chicken limb bud cells (EC50 of 15-20 nM). A peptide 1-17 representing the N-terminal basic part of BMP-2 as well as heparin increased the specific activity of the protein about fivefold in the limb bud assay. These observations suggested that the N-terminai reduce the specific activity of BMP-2, probably by interacting with heparinic sites in the extracellular matrix. This conclusion was supported by a variant EHBMP-2, where the N-terminal residues 1-12 of BMP-2 had been substituted by a dummy sequence of equal length and which showed an EC50 value of around 1 nM which was affected neither by heparin nor by peptide 1-17. A physical interaction between BMP-2 and heparin could be seen in biosensor experiments, where BMP-2 bound to immobilized heparin with a dissociation constant, Kd, of approximately 20 nM, whereas the heparin-binding of variant EHBMP-2 was negligible. These results identify the basic N-terminal domains of dimeric BMP-2 as heparin-binding sites that are not obligatory for receptor activation but modulate its biological activity.