BCL-2-associated athanogene-1 (BAG-1) is expressed by osteoblast-lineage cells; early embryonic lethality in Bag-1 null mice, however, has limited the investigation of BAG-1 function in osteoblast development. In the present study, bone morphogenetic protein-2/BMP-2-directed osteogenic differentiation of bone marrow stromal cells (BMSCs) of Bag-1(+/-) (heterozygous) female mice was decreased significantly. Genes crucial for osteogenic differentiation, bone matrix formation and mineralisation were expressed at significantly lower levels in cultures of Bag-1(+/-) BMSCs supplemented with BMP-2, while genes with roles in inhibition of BMP-2-directed osteoblastogenesis were significantly upregulated. 17-β-estradiol (E2) enhanced responsiveness of BMSCs of wild-type and Bag-1(+/-) mice to BMP-2, and promoted robust BMP-2-stimulated osteogenic differentiation of BMSCs. BAG-1 can modulate cellular responses to E2 by regulating the establishment of functional estrogen receptors (ERs), crucially, via its interaction with heat shock proteins (HSC70/HSP70). Inhibition of BAG-1 binding to HSC70 by the small-molecule chemical inhibitor, Thioflavin-S, and a short peptide derived from the C-terminal BAG domain, which mediates binding with the ATPase domain of HSC70, resulted in significant downregulation of E2/ER-facilitated BMP-2-directed osteogenic differentiation of BMSCs. These studies demonstrate for the first time the significance of BAG-1-mediated protein-protein interactions, specifically, BAG-1-regulated activation of ER by HSC70, in modulation of E2-facilitated BMP-2-directed osteoblast development.