The role of glucocorticoids in bone formation presents a problem because although pharmacological doses in vivo give rise to osteoporosis, physiological concentrations are required for osteoblast (OB) differentiation in vitro. To try and rationalize this dichotomy, we investigated the effect of dexamethasone on the recruitment of OB precursors present in bone marrow. Using the GFU-f assay, we can measure (1) total colony formation; (2) the osteoblastic differentiation of the colonies defined as their ability to express alkaline phosphatase, synthesize collagen, and to calcify; and (3) colony expansion as either average colony surface area or average colony number. In control cultures and in the presence of 10(-10)-10(-9) M dexamethasone, colony formation and total cell number was maximal, but the addition of PGE, had no effect on colony number and very few colonies expressed the OB phenotype. In the presence of 10(-8)-10(-7) M dexamethasone, colony numbers and total cell numbers were reduced but were increased by the addition of PGE(2), the average colony cell number and surface area were relatively unchanged and a proportion of the colonies expressed APase, calcified and synthesized collagen. In cultures containing 10(-6)-10(-5) M dexamethasone, colony numbers were further reduced but were stimulated by the addition of PGE(2) and some colonies differentiated; however, colony expansion was dramatically reduced by up to 80%. These results suggest that physiological levels of glucocorticoids are necessary for OB differentiation and allow the control of OB recruitment by PGE(2). High levels of glucocorticoids drastically reduce proliferation of the OB precursors leading to glucocorticoid-induced osteoporosis.