Gremlin is a glycoprotein that binds bone morphogenetic proteins (BMPs) 2, 4, and 7, antagonizing their actions. Gremlin opposes BMP effects on osteoblastic differentiation and function in vitro and in vivo, and its overexpression causes osteopenia. To define the function of gremlin in the skeleton, we generated gremlin 1 (grem1) conditional null mice by mating mice where grem1 was flanked by lox(P) sequences with mice expressing the Cre recombinase under the control of the osteocalcin promoter. grem1 null male mice displayed increased trabecular bone volume due to enhanced osteoblastic activity, because mineral apposition and bone formation rates were increased. Osteoblast number and bone resorption were not altered. Marrow stromal cells from grem1 conditional null mice expressed higher levels of alkaline phosphatase activity. Gremlin down-regulation by RNA interference in ST-2 stromal and MC3T3 osteoblastic cells increased the BMP-2 stimulatory effect on alkaline phosphatase activity, on Smad 1/5/8 phosphorylation, and on the transactivation of the BMP/Smad reporter construct 12xSBE-Oc-pGL3. Gremlin down-regulation also enhanced osteocalcin and Runx-2 expression, Wnt 3a signaling, and activity in ST-2 cells. In conclusion, deletion of grem1 in the bone microenvironment results in sensitization of BMP signaling and activity and enhanced bone formation in vivo.