We investigated the relationship between disease activity, serum biological mediators of joint damage, and periarticular bone loss in inflammatory arthritis. Patients with early inflammatory arthritis were recruited from a dedicated early arthritis clinic. At the time of recruitment, all had clinical evidence of synovitis. Patients were assessed at baseline and at 1-year follow-up. Periarticular and axial bone mineral density (BMD) was measured by dual-energy X-ray absorptiometry. Serum levels of matrix metalloproteinase 1 and tissue inhibitor of metalloproteinases 1 (TIMP-1) were measured by enzyme-linked immunosorbent assay. A total 38 patients were included in the study. Twenty had rheumatoid arthritis (RA) and 18 had a seronegative spondylarthropathy (SpA). At baseline, periarticular hand BMD measurements were similar in RA and SpA. At 1 year, the mean periarticular hand BMD was significantly lower in RA (p < 0.05). Significant inverse correlations between both the Ritchie articular index and C-reactive protein levels and the change in periarticular hand BMD at 1 year were observed in RA (r = -0.792, p < 0.001 and r = -0.478, p = 0.045, respectively). Baseline TIMP-1 levels correlated with the change in periarticular hand BMD at 1 year in RA (r = 0.519, p = 0.02). At 1 year, radiographic measures of joint damage were highest in RA. Inverse correlations between the change in periarticular hand BMD and the changes in erosion score (r = -0.90, p = 0.04) were observed in patients demonstrating significant periarticular bone loss. Persistent disease activity was associated with increased periarticular bone loss in the hands in patients with RA, consistent with synovitis-mediated periarticular bone loss. The correlation between baseline TIMP-1 levels and periarticular bone loss over 1 year suggests that TIMP-1 may have utility as a biomarker of periarticular bone loss in early RA.