Insufficient blood vessel supply is a primary limiting factor for regenerative approaches to large bone defect repair. Recombinant BMP-2 delivery induces robust bone formation and has been observed to enhance neovascularization, but whether the angiogenic effects of BMP-2 are due to direct endothelial cell stimulation or to indirect paracrine signaling remains unclear. Here, we evaluated the effects of BMP-2 delivery on vascularized bone regeneration and tested whether BMP-2 induces neovascularization directly or indirectly. We found that delivery of BMP-2 (5 μg) enhanced both bone formation and neovascularization in critically sized (8 mm) rat femoral bone defects; however, BMP-2 did not directly stimulate angiogenesisin vitro. In contrast, conditioned medium from both mesenchymal progenitor cells and osteoblasts induced angiogenesisin vitro, suggesting a paracrine mechanism of BMP-2 action. Consistent with this inference, co-delivery of BMP-2 with endothelial colony forming cells (ECFCs) to a heterotopic site, distant from the bone marrow niche, induced ossification but had no effect on neovascularization. Taken together, these data suggest that BMP-2 induces neovascularization during bone regeneration primarily through paracrine activation of osteoprogenitor cells.