The molecular basis for the inverse relationship between differentiation and tumorigenesis is unknown. The function of runx2, a master regulator of osteoblast differentiation belonging to the runt family of tumor suppressor genes, is consistently disrupted in osteosarcoma cell lines. Ectopic expression of runx2 induces p27^KIP1, thereby inhibiting the activity of S-phase cyclin complexes and leading to the dephosphorylation of the retinoblastoma tumor suppressor protein (pRb) and a G1 cell cycle arrest. Runx2 physically interacts with the hypophosphorylated form of pRb, a known coactivator of runx2, thereby completing a feed-forward loop in which progressive cell cycle exit promotes increased expression of the osteoblast phenotype. Loss of p27^KIP1 perturbs transient and terminal cell cycle exit in osteoblasts. Consistent with the incompatibility of malignant transformation and permanent cell cycle exit, loss of p27^KIP1 expression correlates with dedifferentiation in high-grade human osteosarcomas. Physiologic coupling of osteoblast differentiation to cell cycle withdrawal is mediated through runx2 and p27^KIP1, and these processes are disrupted in osteosarcoma.