We have identified a novel zinc finger-containing transcription factor, called Osterix (Osx), that is specifically expressed in all developing bones. In Osx null mice, no bone formation occurs. In endochondral skeletal elements of Osx null mice, mesenchymal cells, together with osteoclasts and blood vessels, invade the mineralized cartilage matrix. However, the mesenchymal cells do not deposit bone matrix. Similarly, cells in the periosteum and in the condensed mesenchyme of membranous skeletal elements cannot differentiate into osteoblasts. These cells do, however, express Runx2/Cbfa1, another transcription factor required for bone formation. In contrast, Osx is not expressed in Runx2/Cbfa1 null mice. Thus, Osx acts downstream of Runx2/Cbfa1. Because Osx null preosteoblasts express typical chondrocyte marker genes, we propose that Runx2/Cbfa1-expressing preosteoblasts are still bipotential cells.