The immune system has profound effects on bone remodeling. IFN-gamma, a major product of immune cells, potently inhibits bone resorption, but its mechanism of action is unknown, We found in cultures of stroma-free mononuclear precursors that IFN-gamma strongly suppresses TRANCE/RANKL-induced osteoclast formation in a dose-dependent manner. This direct effect on osteoclast progenitors was not due to stimulation of NO production by IFN-gamma, as the NOS inhibitors 1400W and L-NAME were unable to reverse the suppression. However, TGF beta(1), which has opposing actions to IFN-gamma on diverse cellular functions, was able to antagonize the effect of IFN-gamma. This suggests that IFN-gamma prevents osteoclast formation by actively directing the differentiation of osteoclastic progenitors toward an alternative cytocidal lineage to the osteoclast.