Aneurysmal bone cyst (ABC) is a pediatric osseous tumor characterized by extensive destruction of the surrounding bone. The molecular mechanisms underlying its pathogenesis are completely unknown. Recent work showed that translocation of the TRE17/USP6 locus occurs in over 60% of ABC cases resulting in TRE17 overexpression. Immature osteoblasts are presumed to be the cell type harboring translocation of TRE17 in at least a subset of ABCs. However, the effects of TRE17 overexpression on transformation and osteoblast function are unknown. TRE17 encodes a ubiquitin-specific protease (USP) and a TBC (TRE2-Bub2-Cdc16) domain that promotes activation of the Arf6 GTPase. Here we report that TRE17 potently inhibits the maturation of MC3T3 pre-osteoblasts in a USP-dependent and Arf6-independent manner. Notably, we find that TRE17 function is mediated through an autocrine mechanism. Transcriptome analysis of TRE17-expressing cells reveals dysregulation of several pathways with established roles in osteoblast maturation. In particular, signaling through the bone morphogenetic protein (BMP) pathway, a key regulator of osteogenesis, is profoundly altered. TRE17 simultaneously inhibits the expression of BMP-4 while augmenting the BMP antagonist, Gremlin-1. Osteoblastic maturation is restored in TRE17-expressing cells by the addition of exogenous BMP-4, thus establishing a functional role for BMP-4 during TRE17-induced transformation. Because bone homeostasis involves a precise balance between the activities of osteoblasts and osteoclasts, our studies raise the possibility that attenuated osteoblast maturation caused by TRE17 overexpression may contribute to the bone loss/destruction observed in ABC.