Bone morphogenetic proteins (BMPs) have played a central role in the development of regenerative therapies for bone reconstruction. However, the high cost and side-effect profile of BMPs limits their broad application. Oxysterols, naturally occurring products of cholesterol oxidation, are promising osteogenic agents alternative to BMPs. The osteogenic capacity of these non-toxic and relatively inexpensive molecules has been documented in rodent models. We studied the impact of Oxy49, a novel oxysterol analogue, on the osteogenic differentiation of rabbit bone marrow stromal cells (BMSCs). Moreover, we evaluated the capacity for in vivo bone regeneration with Oxy49 in rabbit cranial bone defects. We found that rabbit BMSCs treated with Oxy49 demonstrated differentiation along osteogenic pathways, and that complete bone regeneration occurred when cranial defects were treated with Oxy49. Collectively, these results demonstrate that Oxy49 has the ability to induce osteogenic differentiation in rabbit BMSCs with an efficacy comparable to that of BMP-2 and to promote significant bone regeneration in cranial defects. Oxysterols may be a viable novel agent in bone tissue engineering. Copyright © 2016 John Wiley & Sons, Ltd.