Osteoblast differentiation and bone formation is stimulated by bone morphogenetic protein (BMP)-2 and its downstream signaling molecules Smad1 and -5 and the osteoblast-specific transcription factor core-binding factor alpha1 (Cbfa1). Proteolytic degradation of Smad1 and Cbfa1 is proteasome-dependent, and intracellular concentrations of Smad1 and Cbfa1 are enhanced by inhibition of the 26 S proteasome. Smad1 degradation is mediated by the E3 ubiquitin ligase Smurf1 (Smad ubiquitin regulatory factor 1), but the specific E3 ligase responsible for Cbfa1 degradation has not been identified. Because Cbfa1 interacts with Smad1, whose degradation is mediated by Smurf1, we examined the effect of Smurf1 on Cbfa1 degradation in osteoblast precursor cells. Smurf1 interacts directly with Cbfa1 and mediates Cbfa1 degradation in a ubiquitin- and proteasome-dependent manner. Because Smurf1 controls the intracellular concentrations of several key molecules in the bone formation cascade, we examined the effect of a mutant form of Smurf1 in osteoblasts and found that expression of mutant Smurf1 markedly enhanced osteoblast differentiation. Smurf1 therefore appears to be an important regulatory factor in osteoblast differentiation and a potential molecular target for identification of bone anabolic agents.