Bone mass is maintained by a fine balance between bone formation by osteoblasts and bone resorption by osteoclasts. Although osteoblasts and osteoclasts have different developmental origins, it is generally believed that the differentiation, function, and survival of osteoclasts are regulated by osteogenic cells. We have previously shown that the extracellular matrix protein, biglycan (Bgn), plays an important role in the differentiation of osteoblast precursors. In this paper, we showed that Bgn is involved in regulating osteoclast differentiation through its effect on osteoblasts and their precursors using both in vivo and in vitro experiments. The in vivo osteolysis experiment showed that LPS (lipopolisaccharide)-induced osteolysis occurred more rapidly and extensively in bgn deficient mice compared to wild type (WT) mice. To further understand the mechanism of action, we determined the effects of Bgn on 1alpha, 25-dihydroxyvitamin D(3) (1,25-(OH)(2)D(3))-induced osteoclast differentiation and bone resorption in an co-culture of calvariae-derived pre-osteoblasts and osteoclast precursors derived from spleen or bone marrow. Time course and dose response experiments showed that tartrate-resistant acid phosphatase-positive multinuclear cells appeared earlier and more extensively in the co-cultures containing calvarial cells from bgn deficient mice than WT mice, regardless of the genotype of osteoclast precursors. The osteoblast abnormality that stimulated osteoclast formation appeared to be independent of the differential production of soluble RANKL and OPG and, instead, due to a decrease in osteoblast maturation accompanied by increase in osteoblastic proliferation. In addition to the imbalance between differentiation and proliferation, there was a differential decrease in secretory leukocyte protease inhibitor (slpi) in bgn deficient osteoblasts treated with 1,25-(OH)(2)D(3). These findings point to a novel molecular factor made by osteoblasts that could potentially be involved in LPS-induced osteolysis.