I ncreased osteoclast activity is responsible for the enhanced bone destruction in postmenopausal osteoporosis, Paget's disease, bone metastasis, and hypercalcemia of malignancy. However, the number of known inhibitory factors that block osteoclast formation and bone resorption are limited. Therefore, we used an expression-cloning approach to identify novel factors produced by osteoclasts that inhibit osteoclast activity. A candidate clone was identified and isolated from a human osteoclast-like multinucleated cell (MNC) cDNA library, named osteoclast inhibitory peptide-1 (OIP-1), and the cDNA sequence was determined. This sequence matched that of the recently identified human stem cell antigen, was structurally similar to the mouse Ly-6 gene family, and the sequence predicted it was a glycosyl phosphatidyl inositol (GPI)-anchored protein that had a cleavable COOH-terminal peptide. Western blot analysis of conditioned media from 293 cells transfected with the OIP-1 cDNA clone confirmed that OIP-1 was released into the media as a membrane-bound GPI-linked protein. Interestingly, both recombinant OIP-1 expressed in Escherichia coli (which does not have GPI linker) and OIP-1 expressed by mammalian cells significantly reduced osteoclast-like MNC formation induced by 1,25-dihydroxyvitamin D3 or PTH-related protein in mouse and human bone marrow cultures, and inhibited 45Ca release from prelabeled bone in fetal rat organ cultures. In contrast, recombinant OIP-1 did not inhibit the growth of a variety of other cell types. These data indicate that OIP-1 is a novel, specific inhibitor of osteoclast formation and bone resorption.