Mutations of critical components of the Wnt pathway profoundly affect skeletal development and maintenance, probably via modulation of β‐catenin signaling. We tested the hypothesis that β‐catenin is involved in mesenchymal lineage allocation to osteogenic cells using a β‐catenin mutant with constitutive transcriptional activity (ΔN151). Although this stable β‐catenin had no effects by itself on osteogenic differentiation of multipotent embryonic cell lines, it synergized with bone morphogenetic protein‐2 (BMP‐2) resulting in dramatic stimulation of alkaline phosphatase activity, osteocalcin gene expression, and matrix mineralization. Likewise, ΔN151 and BMP‐2 synergistically stimulated new bone formation after subperiosteal injection in mouse calvaria in vivo. Conversely, ΔN151 prevented adipogenic differentiation from pre‐adipocytic or uncommitted mesenchymal cells in vitro. Intriguingly, the synergism with BMP‐2 on gene transcription occurred without altering expression of Cbfa1/Runx2, suggesting actions independent or downstream of this osteoblast‐specific transcription factor. Thus, β‐catenin directs osteogenic lineage allocation by enhancing mesenchymal cell responsiveness to osteogenic factors, such as BMP‐2, in part via Tcf/Lef dependent mechanisms. In vivo, this synergism leads to increased new bone formation. © 2004 Wiley‐Liss, Inc.