Bone morphogenetic protein-7 (BMP-7) regulates cartilage metabolism and promotes matrix synthesis. However, the effect of BMP-7 on inflammatory arthritis remains unknown. We investigated the effect and mechanism of exogenous BMP-7 on cartilage and synovium in vivo in rat zymosan-induced arthritis. Zymosan was injected into the left knees of Wistar rats. Phosphate-buffered saline or BMP-7 at 10, 100, or 1000 ng per joint was injected into the left knee every 2 days. Normal joints acted as normal controls. The knee joints were analyzed histologically and immunohistologically at 14 days. Joint swelling was evaluated by measuring the transverse diameter of the knee joints. Synovial lysates were collected, and the concentrations of interleukin-1β (IL-1β), IL-6, and IL-10 were measured by enzyme-linked immunosorbent assay. Intra-articular injection of zymosan resulted in acute inflammation and was followed by cartilage degeneration. Local administrations of BMP-7 inhibited this loss of cartilage matrix in a dose-dependent manner. Immunohistochemical analysis demonstrated enhanced type II collagen levels in cartilage and enhanced BMP-7 levels in cartilage and synovium after exogenous BMP-7 treatment. Joint swelling and cell infiltration into synovium were significantly reduced by BMP-7 injections. Administration of BMP-7 decreased IL-1β production significantly and increased IL-10 production in the synovium. Thus, intra-articular injections of BMP-7 had a protective effect on cartilage degeneration in the inflammatory arthritis model by enhancing levels of BMP-7 in cartilage and suppressing the production of IL-1β in synovium.