IGFBP-4 is an inhibitor of IGF-I in bone. We show that TGF-beta regulates IGFBP-4 and enhances IGF-I-stimulated growth of cultured human bone cells through increased expression of an IGFBP-4 protease, PAPP-A. This effect of TGF-beta on IGF-I bioavailability may promote local bone formation. Insulin-like growth factor binding protein (IGFBP-4) proteolysis is implicated in the regulation of local insulin-like growth factor (IGF)-I bioavailability during bone remodeling. The IGFBP-4 protease secreted by normal adult human osteoblastic (hOB) cells in culture is a novel metalloproteinase, pregnancy-associated plasma protein-A (PAPP-A). We have recently identified an inhibitor of PAPP-A, the precursor form of major basic protein (proMBP). Very little is known about the molecular regulation of this IGFBP-4 protease system. In the present study, we determined the effect of transforming growth factor (TGF)-beta and IGF-II, the two most abundant growth factors in human bone, on PAPP-A and proMBP expression in primary cultures of hOB cells. Treatment with TGF-beta resulted in time- and dose-dependent increases in PAPP-A mRNA expression, with a maximal 12-fold increase after 24 h of stimulation with 10 ng/ml TGF-beta. Increased PAPP-A levels in hOB cell-conditioned medium paralleled PAPP-A gene expression. In addition, TGF-beta completely suppressed proMBP expression. Treatment of hOB cells with IGF-II had no effect on PAPP-A or proMBP gene expression. However, IGFBP-4 proteolysis in cell-free assay was dependent on IGF-II, and there was increased IGF-II-dependent IGFBP-4 protease activity in conditioned medium from hOB cells that were treated with TGF-beta. IGF-I stimulation of hOB cell proliferation was markedly enhanced by pretreatment with TGF-beta and [Leu27]IGF-II, and this enhancement was prevented with protease-resistant IGFBP-4. In summary, TGF-beta regulates IGFBP-4 proteolysis in hOB cells through increased expression of the protease, PAPP-A, and decreased expression of the inhibitor, proMBP. However, functional activation of the IGFBP-4 protease system is dependent on IGF-II, which acts at a post-translational level. These data support a model whereby local TGF-beta and IGF-II in the bone microenvironment coordinately amplify IGF-I bioavailability through controlled IGFBP-4 proteolysis, which may be a means to promote bone formation.