Signaling through the IGF-I receptor by locally synthesized IGF-I or IGF-II is critical for normal skeletal development and for bone remodeling and repair throughout the lifespan. In most tissues, IGF actions are modulated by IGF binding proteins (IGFBPs). IGFBP-5 is the most abundant IGFBP in bone, and previous studies have suggested that it may either enhance or inhibit osteoblast differentiation in culture and may facilitate or block bone growth in vivo. To resolve these contradictory observations and discern the mechanisms of action of IGFBP-5 in bone, we studied its effects in differentiating osteoblasts and in primary bone cultures. Purified wild-type (WT) mouse IGFBP-5 or a recombinant adenovirus expressing IGFBP-5^WT each prevented osteogenic differentiation induced by the cytokine BMP-2 at its earliest stages without interfering with BMP-mediated signaling, whereas an analog with reduced IGF binding (N domain mutant) was ineffective. When added at later phases of bone cell maturation, IGFBP-5^WT but not IGFBP-5^N blocked mineralization, prevented longitudinal growth of mouse metatarsal bones in short-term primary culture, and inhibited their endochondral ossification. As an IGF-I variant (R³IGF-I) with diminished affinity for IGFBPs promoted full osteogenic differentiation in the presence of IGFBP-5^WT, our results show that IGFBP-5 interferes with IGF action in osteoblasts and provides a framework for discerning mechanisms of collaboration between signal transduction pathways activated by BMPs and IGFs in bone.