Type 1 diabetes in humans has as one of its complications inadequate bone formation, resulting in osteopenia and delayed fracture healing. To investigate the mechanisms by which diabetes affects bone formation, experiments were performed in a marrow ablation model. Mice were made diabetic by multiple low-dose streptozotocin treatment, and controls were treated with vehicle alone. Killing occurred 0, 2, 4, 6, 10, and 16 d following marrow ablation. Histologic analysis demonstrated that the amount of immature mesenchymal tissue was equivalent in both the experimental and control groups on d 4. On d 6 a burst of bone formation occurred in the control group that was significantly reduced in the diabetic group. This deficit was evident at the molecular level as shown by diminished expression of osteocalcin, collagen types I. When transcription factors were examined, core-binding factor alpha1 (Cbfa1)/runt domain factor-2 (Runx-2) and human homolog of the drosophila distal-less gene (Dlx5) expression were substantially reduced in the diabetic, compared with control, groups on d 4 and 6. C-fos but not c-jun expression was also suppressed in the diabetic group but not closely linked to bone formation. Insulin treatment substantially reversed the effect of diabetes on the expression of bone matrix osteocalcin and collagen type I and transcription factors Cbfa1/Runx2 and Dlx5. These results indicate that diabetic animals produce sufficient amounts of immature mesenchymal tissue but fail to adequately express genes that regulate osteoblast differentiation, Cbfa1/Runx-2 and Dlx5, which in turn, leads to decreased bone formation.