Tumor necrosis factor-α (TNF-α) has a key role in skeletal disease in which it promotes reduced bone formation by mature osteoblasts and increased osteoclastic resorption. Here we show that TNF inhibits differentiation of osteoblasts from precursor cells. TNF-α treatment of fetal calvaria precursor cells, which spontaneously differentiate to the osteoblast phenotype over 21 days, inhibited differentiation as shown by reduced formation of multilayered, mineralizing nodules and decreased secretion of the skeletal-specific matrix protein osteocalcin. The effect of TNF was dose dependent with an IC₅₀ of 0.6 ng/ml, indicating a high sensitivity of these precursor cells. Addition of TNF-α from days 2–21, 2–14, 7–14, and 7–10 inhibited nodule formation but addition of TNF after day 14 had no effect. Partial inhibition of differentiation was observed with addition of TNF on only days 7–8, suggesting that TNF could act during a critical period of phenotype selection. Growth of cells on collagen-coated plates did not prevent TNF inhibition of differentiation, suggesting that inhibition of collagen deposition into matrix by proliferating cells could not, alone, explain the effect of TNF. Northern analysis revealed that TNF inhibited the expression of insulin-like growth factor I (IGF-I). TNF had no effect on expression of the osteogenic bone morphogenic proteins (BMPs-2, -4, and -6), or skeletal LIM protein (LMP-1), as determined by semiquantitative RT-PCR. Addition of IGF-I or BMP-6 to fetal calvaria precursor cell cultures enhanced differentiation but could not overcome TNF inhibition, suggesting that TNF acted downstream of these proteins in the differentiation pathway. The clonal osteoblastic cell line, MC3T3-E1–14, which acquires the osteoblast phenotype spontaneously in postconfluent culture, was also studied. TNF inhibited differentiation of MC3T3-E1–14 cells as shown by failure of mineralized matrix formation in the presence of calcium and phosphate. TNF was not cytotoxic to either cell type as shown by continued attachment and metabolism in culture, trypan blue exclusion, and Alamar Blue cytotoxicity assay. These results demonstrate that TNF-α is a potent inhibitor of osteoblast differentiation and suggest that TNF acts distal to IGF-I, BMPs, and LMP-1 in the progression toward the osteoblast phenotype.