The transcription factor NFκB is constitutively activated in various tumor cells where it promotes proliferation and represses apoptosis. The bone morphogenetic proteins (BMPs) delay cell proliferation and promote differentiation and apoptosis of bone cells through activation of Smad downstream effectors and via Smad-independent mechanisms. Thus, NFκB and BMP pathways play opposing roles in regulating osteoblastic cell fate. Here, we show that in osteosarcoma Saos2 osteoblasts, NFκB regulates the activity of the BMP/Smad signaling. Inhibition of NFκB by overexpression of mIκB leads to the induction of osteoblast differentiation. Saos2 cells overexpressing mIκB (Saos2-mIκB) exhibit higher expression of osteoblast phenotypic genes such as alkaline phosphatase, Runx2 and osteocalcin and are more responsive to BMP2 in comparison to wild-type cells (Saos2-wt) or empty vector infected controls (Saos2-EV). Furthermore, BMP-2 signaling and Smad phosphorylation are significantly increased in Saos2-mIκB cells in comparison to Saos2-EV cells. Inhibition of NFκB signaling in Saos2-mIκB cells is associated with decreased expression of the BMP signaling inhibitor Smad7. While gain of Smad7 function in Saos2-mIκB cells results in inhibition of BMP signaling, anti-sense knockdown of Smad7 in Saos2-EV cells leads to upregulation of BMP signaling. We therefore conclude that in osteosarcoma Saos2 cells, NFκB represses BMP/Smad signaling and BMP2-induced differentiation through Smad7.