Bone morphogenetic protein-2 (BMP-2) is a novel differentiation factor that is capable of inducing osteoblast differentiation and bone formation, making it an attractive option in treatment of bone defects, fractures, and spine fusions. Inflammation, which was a common situation during bone healing, is recognized to inhibit osteogenic differentiation and bone formation. However, the effect of inflammation on BMP-2-induced osteoblastic differentiation remains ambiguous. In this study, we showed that an inflammatory environment triggered by lipopolysaccharide (LPS) in vitro would suppress BMP-2-induced osteogenic differentiation of bone marrow mesenchymal stem cells, which represented by decreased alkaline phosphatase (ALPase) activity and down-regulated osteogenic genes. In addition, LPS activated nuclear factor-κB (NF-κB) via a TLR4/MyD88-dependent manner and inhibited BMP-2-induced phosphorylation and nuclear translocation of Smad1/5/8. The blocking of NF-κB signaling by pretreatment with specific inhibitors such as BAY-11-7082, TPCK and PDTC, or by transfection with plasmids encoding p65 siRNA or IκBα siRNA could significantly reverse the inhibitory effect of LPS on BMP-2-induced BMP/Smad signaling and osteogenic differentiation. By contrast, even without stimulation of LPS, overexpression of p65 gene showed obvious inhibitory effects on BMP-2-induced BMP/Smad signaling and ALPase activity. These data indicate that the LPS-mediated inflammatory environment inhibits BMP-2-induced osteogenic differentiation, and that the crosstalk between TLR4/MyD88/NF-κB and BMP/Smad signaling negatively modulates the osteoinductive capacity of BMP-2.