Although cells of the osteoblast lineage express functional ERs, direct effects of estrogen on bone formation remain obscure. In the present study, we have investigated estrogen effects on osteoblastic and adipocytic differentiation from a mouse bone marrow stromal cell line, ST-2, which had been manipulated to overexpress either human ER alpha (ST2ER alpha) or ER beta (ST2ER beta). Treatment with bone morphogenetic protein-2 increased alkaline phosphatase activity as well as the number of Oil Red O-positive adipocytes, indicating that bone morphogenetic protein-2 stimulated both osteoblastic and adipocytic differentiation from these bipotential cells. In both ST2ER alpha and ST2ER beta cells, cotreatment with E2 caused enhancement of alkaline phosphatase activity and suppression of lipid accumulation. These effects were completely reversed by an ER antagonist, ICI182780. Therefore, the estrogen regulation occurred in an ER-specific manner but without ER subtype specificity. Moreover, dose response curves of the opposing effects of estrogen on osteoblastogenesis and adipogenesis formed an apparent mirror image, consistent with a reciprocal regulation of differentiation into the two cell lineages. These results demonstrate that estrogen directly modulates differentiation of bipotential stromal cells into the osteoblast and adipocyte lineages, causing a lineage shift toward the osteoblast. Such effects would lead to direct stimulation of bone formation and thereby contribute to the protective effects of estrogen on bone.