Sclerostin is expressed by osteocytes and has catabolic effects on bone. It has been shown to antagonize bone morphogenetic protein (BMP) and/or Wnt activity, although at present the underlying mechanisms are unclear. Consistent with previous findings, Sclerostin opposed direct Wnt3a-induced but not direct BMP7-induced responses when both ligand and antagonist were provided exogenously to cells. However, we found that when both proteins are expressed in the same cell, sclerostin can antagonize BMP signaling directly by inhibiting BMP7 secretion. Sclerostin interacts with both the BMP7 mature domain and pro-domain, leading to intracellular retention and proteasomal degradation of BMP7. Analysis of sclerostin knock-out mice revealed an inhibitory action of sclerostin on Wnt signaling in both osteoblasts and osteocytes in cortical and cancellous bones. BMP7 signaling was predominantly inhibited by sclerostin in osteocytes of the calcaneus and the cortical bone of the tibia. Our results suggest that sclerostin exerts its potent bone catabolic effects by antagonizing Wnt signaling in a paracrine and autocrine manner and antagonizing BMP signaling selectively in the osteocytes that synthesize simultaneously both sclerostin and BMP7 proteins.