Genetic studies show that Msx2 and Dlx5 homeodomain (HD) proteins support skeletal development, but null mutation of the closely related Dlx3 gene results in early embryonic lethality. Here we find that expression of Dlx3 in the mouse embryo is associated with new bone formation and regulation of osteoblast differentiation. Dlx3 is expressed in osteoblasts, and overexpression of Dlx3 in osteoprogenitor cells promotes, while specific knock-down of Dlx3 by RNA interference inhibits, induction of osteogenic markers. We characterized gene regulation by Dlx3 in relation to that of Msx2 and Dlx5 during osteoblast differentiation. Chromatin immunoprecipitation assays revealed a molecular switch in HD protein association with the bone-specific osteocalcin (OC) gene. The transcriptionally repressed OC gene was occupied by Msx2 in proliferating osteoblasts, while Dlx3, Dlx5, and Runx2 were recruited postproliferatively to initiate transcription. Dlx5 occupancy increased over Dlx3 in mature osteoblasts at the mineralization stage of differentiation, coincident with increased RNA polymerase II occupancy. Dlx3 protein-DNA interactions stimulated OC promoter activity, while Dlx3-Runx2 protein-protein interaction reduced Runx2-mediated transcription. Deletion analysis showed that the Dlx3 interacting domain of Runx2 is from amino acids 376 to 432, which also include the transcriptionally active subnuclear targeting sequence (376 to 432). Thus, we provide cellular and molecular evidence for Dlx3 in regulating osteoprogenitor cell differentiation and for both positive and negative regulation of gene transcription. We propose that multiple HD proteins in osteoblasts constitute a regulatory network that mediates development of the bone phenotype through the sequential association of distinct HD proteins with promoter regulatory elements.