Interleukin-10 (IL-10) inhibits osteoclast (OC) formation in rat and mouse systems. However, little is known concerning the mechanism of this inhibitory effect. Using a coculture system of mouse bone marrow cells and primary osteoblastic cells (POB), we evaluated the potential target cells for IL-10 and components of the IL-10 activating pathway. In the coculture system, IL-10 treatment abolished OC differentiation in a dose-dependent manner. This inhibitory effect occurred regardless of the stage of cellular proliferation and differentiation, suggesting that IL-10 may act on a variety of genes participating in OC formation. IL-10 specifically abrogated the production of IL-6 by enriched bone marrow-derived mononuclear cells (BMM) but not by osteoblastic cells. IL-10 treatment also stimulated the binding of a protein in the BMM to an IL-10 response element, whereas no such activation was induced in osteoblastic cells. In contrast, interferon gamma (IFN-gamma), another inhibitory factor, stimulated tyrosine-phosphorylated proteins to bind to an IL-10 response element in both monocytes and osteoblastic cells. These data suggest that the BMM are the direct target of IL-10 action. Importantly, oligonucleotide-specific precipitation confirmed that IL-10 treatment strongly augmented 88, 85, and 70 kDa tyrosine-phosphorylated proteins in BMM. Taken together, these data show that IL-10 inhibits mouse OC formation by acting directly on hemopoietic OC precursor, through a novel signal transduction and activation pathway.