While several studies report that bone morphogenetic proteins (BMPs) and vascular endothelial growth factor (VEGF) can act synergistically to improve bone tissue engineering, others suggest that VEGF inhibits osteogenesis. The purpose of these experiments was therefore to evaluate the effect of dual transfection of these growth factors and potential mechanisms of interaction on gene expression and osteogenesis in vitro and in vivo. Marrow-derived mesenchymal stem cells (MSCs) were exposed to recombinant VEGF protein or transfected with adenoviruses encoding BMP2, VEGF, or LacZ in a variety of ratios. Alterations in gene and protein expression in vitro as well as bone formation in vivo were assessed. MSC exposure to AdV-VEGF or recombinant VEGF inhibited BMP2 mRNA expression, protein production, and MSC differentiation. Coculture experiments revealed that BMP2 suppression occurs through both an autocrine and a paracrine mechanism, occurring at the transcriptional level. Compared to controls, cotransfection of VEGF and BMP2 transgenes prevented ectopic bone formation in vivo. VEGF is a potent inhibitor of BMP2 expression in MSCs, and supplementation or overexpression of VEGF inhibits osteogenesis in vitro and ectopic bone formation in vivo. Strategies to utilize MSCs in bone tissue engineering therefore require careful optimization and precise delivery of growth factors for maximal bone formation.