Osteocalcin, the most abundant noncollagenous protein of bone matrix, has been demonstrated to inhibit bone growth by gene knockout experiments (Ducy, P., Desbois, C., Boyce, B., Pinero, G., Story, B., Dunstan, C., Smith, E., Bonadio, J., Goldstein, S., Gundberg, C., Bradley, A., and Karsenty, G. (1996) Nature 382, 448-452). Its specific functional mechanism in bone metabolism is, however, largely unknown. In this study, we provide evidence that osteocalcin has an inhibitory effect on tissue transglutaminase activity, as measured by cross-linking of osteopontin, another bone matrix protein. Using a set of synthetic peptides, we found that the inhibitory activity resided within the first 13 N-terminal amino acid residues of osteocalcin. An N-terminal peptide also inhibited cross-linking of another tissue transglutaminase substrate, beta-casein. The inhibitory peptide was shown to have affinity for the substrates of transglutaminase rather than for the enzyme. Since the N terminus of osteocalcin exhibits homology to the substrate recognition site sequences of two transglutaminases, we conclude that the inhibitory effect is most likely due to competition with the enzyme for the transglutaminase-binding region of the substrates, osteopontin and beta-casein, which prevents access of the enzyme to them to perform its function. The interference of osteocalcin with osteopontin cross-linking gives osteocalcin a new potential function as the first protein inhibitor of tissue transglutaminase. This suggests a specific role and a plausible mechanism for it as a modulator of maturation, stabilization, and calcification of bone matrix.