Bone morphogenetic proteins (BMPs) are important regulators of cellular differentiation and embryonic development. Beta catenin mediated nuclear signaling has been implicated in BMP-2-modulated chondrogenic differentiation in the pluripotential stem cell line C3H10T1/2. However, there is little information on the functional role of beta catenin in BMP-2-modulated differentiation of primary nontransformed mesenchymal cells. Here, we present evidence to show that BMP-2-induced chondrogenic differentiation in high-density primary mesenchymal culture is associated with a significant decrease in membrane-bound beta catenin by 72 hours compared to controls. Nuclear localization of beta catenin is not detectable by immunofluorescence and the TCF-responsive reporter vector TOPFLASH shows only background activity during chondrogenic differentiation. BMP-2-treated cultures show reduced cell-cell adhesion by 72 hours, which correlates with the changes in levels of membrane-bound beta catenin. Up-regulation of membrane-bound beta catenin blocks the effect of BMP-2 on both chondrogenic differentiation and cell-cell adhesiveness. These findings suggest that BMP-2 can modulate the adhesivity of adherens junctions through regulation of membrane bound beta catenin.