Isozymes of 11beta-hydroxysteroid dehydrogenase (11beta-HSD) act at a prereceptor level to regulate the tissue-specific availability of active glucocorticoids. To examine the effect of this on cell proliferation and differentiation, we have developed transfectant variants of a rat osteosarcoma cell line that express cDNA for 11beta-HSD1 (ROS 17/2.8beta1) or 11beta-HSD2 (ROS 17/2.8beta2). ROS 17/2.8beta1 showed net conversion of cortisone to cortisol whereas ROS 17/2.8beta2 showed only inactivation of cortisol to cortisone. There was no significant difference in glucocorticoid receptor (GR) expression between the different clones. However, in proliferation and differentiation studies, ROS 17/2.8beta2 cells were completely resistant to cortisol. In contrast, ROS 17/2.8beta1 were sensitive to both cortisone and cortisol. Expression of 11beta-HSD1 decreased cell proliferation whereas 11beta-HSD2 increased proliferation. These responses appear to be due to metabolism of endogenous serum glucocorticoids; proliferation of ROS 17/2.8beta1 decreased further with exogenous cortisone or cortisol whereas ROS 17/2.8beta2 were resistant to both compounds. The pro-proliferative effects of 11beta-HSD2 were abrogated by 18beta-glycyrrhetinic acid, an 11beta-HSD inhibitor, and in cells transfected with cDNA encoding inactive 11beta-HSD2. Data indicate that differential regulation of 11beta-HSD1 and 2 (rather than GR expression) is a key determinant of cell proliferation. Dysregulated expression of 11beta-HSD2 may be a novel feature of tumorigenesis.