We have previously established the presence of a functional bone morphogenetic protein (BMP) system in the ovary by demonstrating the expression of BMP ligands and receptors as well as novel cellular functions. Specifically, BMP-4 and BMP-7 are expressed in theca cells, and their receptors by granulosa cells. These BMPs enhanced and attenuated the stimulatory action of FSH on estradiol and progesterone production, respectively. To investigate the underlying mechanism of the differential regulation, we analyzed mRNA levels for key regulators in the steroid biosynthetic pathways by RNase protection assay. BMP-7 enhanced P450 aromatase (P450_arom) but suppressed steroidogenic acute regulatory protein (StAR) mRNAs induced by FSH, whereas mRNAs encoding further-downstream steroidogenic enzymes, including P450 side-chain cleavage enzyme and 3β-hydroxysteroid dehydrogenase, were not significantly altered. These findings suggest that BMP-7 stimulation and inhibition of P450_arom and StAR mRNA expression, respectively, may play a role in the mechanisms underlying the differential regulation of estradiol and progesterone production. To establish the physiological relevance of BMP functions, we investigated the in vivo effects of injections of recombinant BMP-7 into the ovarian bursa of rats. Ovaries treated with BMP-7 had decreased numbers of primordial follicles, yet had increased numbers of primary, preantral, and antral follicles, suggesting that BMP-7 may act to facilitate the transition of follicles from the primordial stage to the pool of primary, preantral, and antral follicles. In this regard, we have also found that BMP-7 caused an increase in DNA synthesis and proliferation of granulosa cells from small antral follicles in vitro. In contrast to the stimulatory activity, BMP-7 exhibited pronounced inhibitory effects on ovulation rate and serum progesterone levels. These findings establish important new biological activities of BMP-7 in the context of ovarian physiology, including folliculogenesis and ovulation.