Cumulative evidence indicates that osteoblasts and adipocytes share a common mesenchymal precursor and that bone morphogenetic proteins (BMPs) can induce both osteoblast and adipocyte differentiation of this precursor. In the present study, we investigated the roles of BMP receptors in differentiation along these separate lineages using a well-characterized clonal cell line, 2T3, derived from the mouse calvariae. BMP-2 induced 2T3 cells to differentiate into mature osteoblasts or adipocytes depending upon culture conditions. To test the specific roles of the type IA and IB BMP receptor components, truncated and constitutively active type IA and IB BMP receptor cDNAs were stably expressed in these cells. Overexpression of truncated type IB BMP receptor (trBMPR-IB) in 2T3 cells completely blocked BMP-2–induced osteoblast differentiation and mineralized bone matrix formation. Expression of trBMPR-IB also blocked mRNA expression of the osteoblast specific transcription factor, Osf2/ Cbfa1, and the osteoblast differentiation-related genes, alkaline phosphatase (ALP) and osteocalcin (OC). BMP-2–induced ALP activity could be rescued by transfection of wild-type (wt) BMPR-IB into 2T3 clones containing trBMPR-IB. Expression of a constitutively active BMPR-IB (caBMPR-IB) induced formation of mineralized bone matrix by 2T3 cells without addition of BMP-2. In contrast, overexpression of trBMPR-IA blocked adipocyte differentiation and expression of caBMPR-IA induced adipocyte formation in 2T3 cells. Expression of the adipocyte differentiation-related genes, adipsin and PPARγ, correlated with the distinct phenotypic changes found after overexpression of the appropriate mutant receptors. These results demonstrate that type IB and IA BMP receptors transmit different signals to bone-derived mesenchymal progenitors and play critical roles in both the specification and differentiation of osteoblasts and adipocytes.