To analyze how estrogen blocks osteoclastogenesis, we investigated the effects of ovariectomy on osteoclast (OC) formation in co-cultures of purified OC precursors and purified stromal cells (SC). OC formation was higher in co-cultures containing SC from ovariectomized mice than in those containing SC from sham-operated mice, thus suggesting that estrogen regulates osteoclastogenesis by targeting SC. Ovariectomy also increased the mononuclear cell secretion of interleukin (IL)-1) and tumor necrosis factor (TNF) and the SC production of macrophage colony-stimulating factor (MCSF). Osteoclastogenesis and SC production of M-CSF were not blocked by in vitro estrogen treatment but were decreased by in vivo treatment of donor mice with either estrogen or a combination of the IL-1 inhibitor, IL-1 receptor antagonist, and the TNF inhibitor, TNF binding protein. IL-1 and TNF production were also blocked by in vivo estrogen treatment, demonstrating that the increased bone marrow levels of IL-1 and TNF characteristic of ovariectomized mice induce the formation of a SC population characterized by a high production of M-CSF and increased pro-osteoclastogenic activity. Since in co-cultures of SC and OC precursors M-CSF levels correlated with OC production (r = 0.7, p < 0.0001), the data also indicate that the pro-osteoclastogenic activity of SC is proportional to their secretion of M-CSF. The ability of estrogen to decrease SC production of M-CSF and the pro-osteoclastogenic activity of these cells by regulating IL-1 and TNF production is a previously undescribed mechanism by which estrogen down-regulates osteoclastogenesis.