Testosterone (T) restores bone mass loss in postmenopausal women and osteoporotic men mainly through its bioconversion to estradiol (E2). In target tissues, T is also biotransformed to the A-ring-reduced metabolites 3α,5α-androstanediol (3α,5α-diol) and 3β,5α-androstanediol (3β,5α-diol), which are potent estrogen receptor (ER) agonists; however, their biological role in bone has not been completely elucidated. To assess if osteoblasts bioconvert T to 3α,5α-diol and to 3β,5α-diol, we studied in cultured neonatal rat osteoblasts the metabolism of [14C]-labeled T. In addition, the intrinsic estrogenic potency of diols on cell proliferation and differentiation in neonatal calvarial rat osteoblasts was also investigated. Osteoblast function was assessed by determining cell DNA, cell-associated osteocalcin, and calcium content, as well as alkaline phosphatase activity and Alp1 gene expression. The results demonstrated that diols were the major bioconversion products of T, with dihydrotestosterone being an obligatory intermediary, thus demonstrating in the rat osteoblasts the activities of 5α-steroid reductase and 3α- and 3β-hydroxysteroid dehydrogenases. The most important finding was that 3β,5α- and 3α,5α-diols induced osteoblast proliferation and differentiation, mimicking the effect of E2. The observation that osteoblast differentiation induced by diols was abolished by the presence of the antiestrogen ICI 182,780, but not by the antiandrogen 2-hydroxyflutamide, suggests that diols effects are mediated through an ER mechanism. The osteoblast capability to bioconvert T into diols with intrinsic estrogen-like potency offers new insights to understand the mechanism of action of T on bone cells and provides new avenues for hormone replacement therapy to maintain bone mass density.