The objective of this study was to determine the effect of systemic delivery of prednisolone phosphate (PLP) encapsulated within long circulating 'stealth' liposomes on bone erosion and osteoclast activity during experimental antigen-induced arthritis (AIA). Liposomal PLP strongly suppressed knee joint swelling, synovial infiltrate and bone erosion in antigen-induced arthritis. The number of active osteoclasts was not only suppressed in bone lesions near inflamed synovium, but also within the trabecular bone of the tibia, suggesting a systemic suppression of osteoclast activation. Furthermore, liposomal PLP directly blocked osteoclast differentiation and bone resorption in vitro while it also suppressed expression of osteoclast differentiation factors M-CSF and RANKL in the synovium. Targeting studies showed that liposomes are most efficiently phagocytosed by macrophages and early precursors of osteoclasts in the bone marrow rather than by mature osteoclasts, indicating a possible inhibition of osteoclast differentiation from an early stage. Conclusion: Liposomal glucocorticoid delivery rather than free PLP offers a more efficacious way to inhibit both inflammation and bone erosion in rheumatoid arthritis. © 2011 Elsevier B.V.