Angiogenesis and bone formation are tightly coupled during the formation of the skeleton. Bone morphogenetic protein (BMP) signaling is required for both bone development and angiogenesis. We recently identified endosome-associated FYVE-domain protein (endofin) as a Smad anchor for BMP receptor activation. Endofin contains a protein-phosphatase pp1c binding domain, which negatively modulates BMP signals through dephosphorylation of the BMP type I receptor. A single point mutation of endofin (F872A) disrupts interaction between the catalytic subunit pp1c and sensitizes BMP signaling in vitro. To study the functional impact of this mutation in vivo, we targeted expression of an endofin (F872A) transgene to osteoblasts. Mice expressing this mutant transgene had increased levels of phosphorylated Smad1 in osteoblasts and showed increased bone formation. Trabecular bone volume was significantly increased in the transgenic mice compared with the wildtype littermates with corresponding increases in trabecular bone thickness and number. Interestingly, the transgenic mice also had a pronounced increase in the density of the bone vasculature measured using contrast-enhanced μCT imaging of Microfil-perfused bones. The vessel surface and volume were both increased in association with elevated levels of vascular endothelial growth factor (VEGF) in osteoblasts. Endothelial sprouting from the endofin (F872A) mutant embryonic metatarsals cultured ex vivo was increased compared with controls and was abolished by an addition of a VEGF neutralizing antibody. In conclusion, osteoblast targeted expression of a mutant endofin protein lacking the pp1c binding activity results in sustained signaling of the BMP type I receptor, which increases bone formation and skeletal angiogenesis. © 2009 American Society for Bone and Mineral Research.