Transforming growth factor-β (TGF-β) is a critical regulator of bone development and remodeling. TGF-β must be activated from its latent form in order to signal. Thrombospondin-1 (TSP1) is a major regulator of latent TGF-β activation and TSP1 control of TGF-β activation is critical for regulation of TGF-β activity in multiple diseases. Bone marrow-derived mesenchymal stem cells (MSCs) have osteogenic potential and they participate in bone remodeling in injury and in response to tumor metastasis. Since both TSP1 and TGF-β inhibit osteoblast differentiation, we asked whether TSP1 blocks osteoblast differentiation of MSCs through its ability to stimulate TGF-β activation. TSP1 added to human bone marrow-derived MSCs under growth conditions increases active TGF-β. Cultured MSCs express TSP1 and both TSP1 expression and TGF-β activity decrease during osteoblast differentiation. TSP1 and active TGF-β block osteoblast differentiation of MSCs grown in osteogenic media as measured by decreased Runx2 and alkaline phosphatase expression. The inhibitory effect of TSP1 on osteoblast differentiation is due to its ability to activate latent TGF-β, since a peptide which blocks TSP1 TGF-β activation reduced TGF-β activity and restored osteoblast differentiation as measured by increased Runx2 and alkaline phosphatase expression. Anti-TGF-β neutralizing antibody also increased alkaline phosphatase expression in the presence of TSP1. These studies show that TSP1 regulated TGF-β activity is a critical determinant of osteoblast differentiation. © 2012 Elsevier Inc.