We investigated the effect of hypoxia on rat osteoblast function in long-term primary cultures. Reduction of pO2 from 20% to 5% and 2% decreased formation of mineralized bone nodules 1.7-fold and 11-fold, respectively. When pO2 was reduced further to 0.2%, bone nodule formation was almost abolished. The inhibitory effect of hypoxia on bone formation was partly due to decreased osteoblast proliferation, as measured by 3H-thymidine incorporation. Hypoxia also sharply reduced osteoblast alkaline phosphatase (ALP) activity and expression of mRNAs for ALP and osteocalcin, suggesting inhibition of differentiation to the osteogenic phenotype. Hypoxia did not increase the apoptosis of osteoblasts but induced a reversible state of quiescence. Transmission electron microscopy revealed that collagen fibrils deposited by osteoblasts cultured in 2% O2 were less organized and much less abundant than in 20% O2 cultures. Furthermore, collagen produced by hypoxic osteoblasts contained a lower percentage of hydroxylysine residues and exhibited an increased sensitivity to pepsin degradation. These data demonstrate the absolute oxygen requirement of osteoblasts for successful bone formation and emphasize the importance of the vasculature in maintaining bone health. We recently showed that hypoxia also acts in a reciprocal manner as a powerful stimulator of osteoclast formation. Considered together, our results help to explain the bone loss that occurs at the sites of fracture, tumors, inflammation and infection, and in individuals with vascular disease or anemia.