Myostatin, a transforming growth factor beta (TGF-beta) family member, is a potent negative regulator of skeletal muscle growth. In this study we characterized the myostatin signal transduction pathway and examined its effect on bone morphogenetic protein (BMP)-induced adipogenesis. While both BMP7 and BMP2 activated transcription from the BMP-responsive I-BRE-Lux reporter and induced adipogenic differentiation, myostatin inhibited BMP7- but not BMP2-mediated responses. To dissect the molecular mechanism of this antagonism, we characterized the myostatin signal transduction pathway. We showed that myostatin binds the type II Ser/Thr kinase receptor. ActRIIB, and then partners with a type I receptor, either activin receptor-like kinase 4 (ALK4 or ActRIB) or ALK5 (TbetaRI), to induce phosphorylation of Smad2/Smad3 and activate a TGF-beta-like signaling pathway. We demonstrated that myostatin prevents BMP7 but not BMP2 binding to its receptors and that BMP7-induced heteromeric receptor complex formation is blocked by competition for the common type II receptor, ActRIIB. Thus, our results reveal a strikingly specific antagonism of BMP7-mediated processes by myostatin and suggest that myostatin is an important regulator of adipogenesis.