Bone morphogenetic protein 2 (BMP-2) is essential for postnatal bone formation and fracture repair. By screening chemical libraries for BMP-2 mimics using a cell-based assay, we identified inhibitors of microtubule assembly as stimulators of BMP-2 transcription. These microtubule inhibitors increased osteoblast differentiation in vitro, stimulated periosteal bone formation when injected locally over murine calvaria, and enhanced trabecular bone formation when administered systemically in vivo. To explore molecular mechanisms mediating these responses, we examined effects of microtubule inhibitors on the hedgehog (Hh) pathway, since this pathway is known to regulate BMP-2 transcription in osteoblasts and microtubules have been shown to be involved in Hh signaling in Drosophila. Here we show that in osteoblasts, inhibition of microtubule assembly increased cytoplasmic levels and transcriptional activity of Gli2, a transcriptional mediator of Hh signaling that we have previously shown to enhance BMP-2 expression in osteoblasts (M. Zhao et al., Mol. Cell. Biol. 26:6197-6208, 2006). Microtubule inhibition blocked beta-TrCP-mediated proteasomal processing of Gli2 in osteoblasts. In summary, inhibition of microtubule assembly enhances BMP-2 gene transcription and subsequent bone formation, in part, through inhibiting proteasomal processing of Gli2 and increasing intracellular Gli2 concentrations.