Sclerosteosis is a progressive sclerosing bone dysplasia. Sclerostin (the SOST gene) was originally identified as the sclerosteosis-causing gene. However, the physiological role of sclerostin remains to be elucidated. Sclerostin was intensely expressed in developing bones of mouse embryos. Punctuated expression of sclerostin was localized on the surfaces of both intramembranously forming skull bones and endochondrally forming long bones. Sclerostin-positive cells were identified as osteoclasts. Recombinant sclerostin protein produced in cultured cells was efficiently secreted as a monomer. We examined effects of sclerostin on the activity of BMP2, BMP4, BMP6, and BMP7 for mouse preosteoblastic MC3T3-E1 cells. Sclerostin inhibited the BMP6 and BMP7 activity but not the BMP2 and BMP4 activity. Sclerostin bound to BMP6 and BMP7 with high affinity but bound to BMP2 and BMP4 with lower affinity. In conclusion, sclerostin is a novel secreted osteoclast-derived BMP antagonist with unique ligand specificity. We suggest that sclerostin negatively regulates the formation of bone by repressing the differentiation and/or function of osteoblasts induced by BMPs. Since sclerostin expression is confined to the bone-resorbing osteoclast, it provides a mechanism whereby bone apposition is inhibited in the vicinity of resorption. Our findings indicate that sclerostin plays an important role in bone remodeling and links bone resorption and bone apposition.