The effect of interleukin‐1β, the major component of osteoclast‐activating factor (OAF), on bone formation by fetal rat osteoblast‐rich cells was investigated. An in vitro culture system developed by Ecarot‐Charrier et al. (1983) and Bellows et al. (1986) was utilized in which osteoblasts form mineralized nodules which closely resemble woven bone. Continuous exposure of cultures to homogenous IL‐1β resulted in potent inhibition of mineralized nodule formation, which was half maximal at 0.1 U/ml (7.5 × 10⁻¹³M). Bone formation may thus be considerably more sensitive to IL‐1β than is bone resorption (half maximal at 3.8 × 10⁻¹¹M). Inhibition of bone formation occurred when cultures were exposed to IL‐1β at both early and late time periods and was unaffected by the presence of indomethacin or by the osteoclast inhibitors calcitonin and γ‐interferon. Instead, IL‐1β exerted multiple inhibitory effects on osteoblast functions, including inhibition of collagen and noncollagen protein synthesis, alkaline phosphatase expression, and cell replication. On a dose response basis, the inhibition of protein synthesis correlated most closely with inhibition of bone formation. IL‐1β is clearly inhibitory rather than stimulatory for bone formation as assessed in this system and is therefore unlikely to function as a coupling factor linking the processes of bone resorption and bone formation.