Runx2 is required for osteoblast differentiation but is expressed in certain nonosteoblastic cells without activating the differentiation process, suggesting that its activity is suppressed through a lineage-specific mechanism. Here we report that primary mouse dermal fibroblasts lacking Smad3 can acquire an osteoblast-like phenotype, including activation of Runx2 activity, expression of osteoblast-specific genes, and calcium deposition. We further show that negative regulation of Runx2 activity by Smad3 in dermal fibroblasts is likely mediated by controlling the expression of Msx2, an antagonist of Runx2 in this cellular context. These data support the presence of a novel mechanism for controlling cell fate determination of mesenchymal lineages by preventing differentiation toward the osteoblastic lineage via negative regulation of Runx2 activity. Copyright © 2005, American Society for Microbiology. All Rights Reserved.