Wnt glycoproteins are important regulators of cellular differentiation and embryonic development. Some Wnt proteins induce stabilization of β-catenin which cooperatively regulates gene expression with LEF/Tcf transcription factors. Here we demonstrate a direct role for β-catenin signaling in osteoblast differentiation and in BMP2-mediated signal transduction. Similar to treatment with BMP-2 protein, ectopic expression of stabilized β-catenin in C3H10T1/2 cells or activation of endogenous β-catenin signaling with LiCl induces expression of alkaline phosphatase mRNA and protein, a defined marker of early osteoblast differentiation. Unlike BMP2 protein, stabilized β-catenin does not induce osteocalcin gene expression, a marker of late osteoblast differentiation. BMP2-induced differentiation also leads to activation of endogenous β-catenin signaling thus implicating β-catenin in early steps of BMP2-mediated osteoblast differentiation. Effects of β-catenin and BMP2 on C3H10T1/2 differentiation are not completely overlapping, implying that some aspects of BMP2-induced differentiation may be mediated by β-catenin signaling and that β-catenin can also participate in non-BMP2-dependent differentiation processes.