The effects of prostaglandin E₂ (PGE₂) on the proliferation and differentiation of osteoblastic cells were studied in osteoblast‐like cells isolated from adult rat calvaria. Treatment of the cells with PGE₂ within the concentration range 10⁻⁸–10⁻⁵ M resulted in a dose‐dependent increase in alkaline phosphatase (ALP) activity, [³H]proline incorporation into collagenase‐digestible protein, and mineralized bone nodule (BN) formation, as well as a dose‐dependent decrease in [³H]thymidine incorporation into the cells. PGE₂ also caused a dose‐dependent increase in the intracellular cyclic adenosine monophosphate (cAMP) content, with a maximal effective concentration of 10⁻⁵ M; this effect of PGE₂ was mimicked by forskolin, an adenylate cyclase activator. The treatment of adult calvarial cells with forskolin decreased BN formation, ALP activity, and collagen synthesis. These results suggested that cAMP does not have a stimulatory, but rather a suppressive, effect on the differentiation of adult rat calvarial cells. A time‐course study of cAMP accumulation showed that both PGE₂‐ and forskolin‐induced cAMP reached a maximum at 5 min after the treatment, but the former rapidly returned to the basal level by 40 min, while the latter declined slowly and was still at 70% of the maximal level at 60 min, suggesting that PGE₂ activates phosphodiesterase as well as adenylate cyclase. The presence of N‐(6‐aminohexyl)‐5‐chloro‐1‐naphthalenesulfonamide (W‐7), a calmodulin antagonist, reduced the rate of degradation of cAMP formed after PGE₂ treatment, suggesting the involvement of calmodulin in the activation of phosphodiesterase. However, PGE₂ also caused the production of inositol 1,4,5‐triphosphate (IP₃) and an elevation of the intracellular Ca²⁺ concentration ([Ca²⁺]_i), both of which peaked at 15 s and returned to the basal level within 1 min. Submaximal responses of the IP₃ production and the [Ca²⁺]_i elevation to PGE₂ were obtained at 10⁻⁵ M. W‐7 decreased both basal and PGE₂‐induced ALP activity, collagen synthesis and BN formation, indicating the involvement of Ca²⁺/calmodulin‐dependent protein kinase in the PGE₂‐induced differentiation of calvarial cells. From these results, we concluded that PGE₂ inhibits the proliferation and stimulates the differentiation of calvarial osteoblasts by elevating the [Ca²⁺]_i through the activation of a phosphoinositide turnover, but not via an activation of adenylate cyclase. We also found that BN formation varies, depending on the time of PGE₂ addition, suggesting that responsiveness of the cells to PGE₂ may change during the culture period. J. Cell. Biochem. 73:36–48, 1999. © 1999 Wiley‐Liss, Inc.