Osteoprotegerin (OPG), a soluble decoy receptor for receptor activator of nuclear factor-kappaB ligand (RANKL)/osteoclast differentiation factor, inhibits both differentiation and function of osteoclasts. We previously reported that OPG-deficient mice exhibited severe osteoporosis caused by enhanced osteoclastic bone resorption. In the present study, potential roles of OPG in osteoclast differentiation were examined using a mouse coculture system of calvarial osteoblasts and bone marrow cells prepared from OPG-deficient mice. In the absence of bone-resorbing factors, no osteoclasts were formed in cocultures of wild-type (+/+) or heterozygous (+/-) mouse-derived osteoblasts with bone marrow cells prepared from homozygous (-/-) mice. In contrast, homozygous (-/-) mouse-derived osteoblasts strongly supported osteoclast formation in the cocultures with homozygous (-/-) bone marrow cells, even in the absence of bone-resorbing factors. Addition of OPG to the cocultures with osteoblasts and bone marrow cells derived from homozygous (-/-) mice completely inhibited spontaneously occurring osteoclast formation. Adding 1alpha,25-dihydroxyvitamin D3 [1alpha,25(OH)2D3] to these cocultures significantly enhanced osteoclast differentiation. In addition, bone-resorbing activity in organ cultures of fetal long bones derived from homozygous (-/-) mice was markedly increased, irrespective of the presence and absence of bone-resorbing factors, in comparison with that from wild-type (+/+) mice. Osteoblasts prepared from homozygous (-/-), heterozygous (+/-), and wild-type (+/+) mice constitutively expressed similar levels of RANKL messenger RNA, which were equally increased by the treatment with 1alpha,25(OH)2D3. When homozygous (-/-) mouse-derived osteoblasts and hemopoietic cells were cocultured, but direct contact between them was prevented, no osteoclasts were formed, even in the presence of 1alpha,25(OH)2D3 and macrophage colony-stimulating factor. These findings suggest that OPG produced by osteoblasts/stromal cells is a physiologically important regulator in osteoclast differentiation and function and that RANKL expressed by osteoblasts functions as a membrane-associated form.