Prostate cancer is known to frequently recur in bone; however, how dormant cells switch its phenotype leading to recurrent tumor remains poorly understood. We have isolated two syngeneic cell lines (indolent and aggressive) through in vivo selection by implanting PC3mm stem-like cells into tibial bones. We found that indolent cells retained the dormant phenotype, whereas aggressive cells grew rapidly in bone in vivo, and the growth rates of both cells in culture were similar, suggesting a role of the tumor microenvironment in the regulation of dormancy and recurrence. Indolent cells were found to secrete a high level of secreted protein acidic and rich in cysteine (SPARC), which significantly stimulated the expression of BMP7 in bone marrow stromal cells. The secreted BMP7 then kept cancer cells in a dormant state by inducing senescence, reducing stemness, and activating dormancy-associated p38 MAPK signaling and p21 expression in cancer cells. Importantly, we found that SPARC was epigenetically silenced in aggressive cells by promoter methylation, but 5-azacytidine treatment reactivated the expression. Furthermore, high SPARC promoter methylation negatively correlated with disease-free survival of prostate cancer patients. We also found that the COX2 inhibitor NS398 down-regulated DNMTs and increased expression of SPARC, which led to tumor growth suppression in bone in vivo. These findings suggest that SPARC plays a key role in maintaining the dormancy of prostate cancer cells in the bone microenvironment.