Osteoblasts and adipocytes arise from a common progenitor cell in bone marrow. Whether estrogen directly regulates the progenitor cells differentiating into osteoblasts or adipocytes remains unknown. Using a mouse clonal cell line KS483 cultured in charcoal-stripped fetal bovine serum (FBS), we showed that 17beta-estradiol (E2) stimulates the differentiation of progenitor cells into osteoblasts and concurrently inhibits adipocyte formation in an estrogen receptor (ER)-dependent way. E2 increased alkaline phosphate (ALP) activity and nodule formation and stimulated messenger RNA (mRNA) expression of core-binding factor alpha-1 (Cbfa1), parathyroid hormone/parathyroid hormone-related protein receptors (PTH/PTHrP-Rs), and osteocalcin. In contrast, E2 decreased adipocyte numbers and down-regulated mRNA expression of peroxisome proliferator-activated receptor-gamma (PPARgamma)2, adipocyte protein 2 (aP2), and lipoprotein lipase (LPL). Furthermore, the reciprocal control of osteoblast and adipocyte differentiation by E2 was observed also in the presence of the adipogenic mixture of isobutylmethylxanthine, dexamethasone, and insulin. Immunohistochemical staining showed that ERalpha and ERbeta were present in osteoblasts and adipocytes. A new mouse splice variant ERbeta2 was identified, which differed in two amino acid residues from the rat isoform. E2 down-regulated mRNA expression of ERalpha, ERbeta1, and ERbeta2. The effects of E2 are not restricted to the KS483 cell line because similar results were obtained in mouse bone marrow cell cultures. Our results indicate that estrogen, in addition to stimulation of osteogenesis, inhibits adipogenesis, which might explain the clinical observations that estrogen-deficiency leads to an increase in adipocytes.