Objective: To evaluate whether improvement of proprioception, pain, or dynamic knee instability mediates the effect of wearing a soft knee brace on activity limitations in patients with knee osteoarthritis (OA). Methods: We conducted an analysis of data for 44 patients with knee OA who were enrolled in a laboratory-based trial evaluating the effect of wearing a commercially available soft knee brace. Activity limitations were assessed with the 10-meter walk test and the Get Up and Go test. Knee joint proprioception was assessed by an active joint position sense test; pain was assessed on a numeric rating scale (NRS) (range 0–10); pressure pain threshold (PPT) was assessed with a hand-held pressure algometer; dynamic knee instability was expressed by the perturbation response, i.e., a measure reflecting a deviation in mean knee varus–valgus angle after a controlled mechanical perturbation on a treadmill, with respect to level walking. Mediation analysis was conducted using the product of coefficients approach. Confidence intervals were calculated with a bootstrap procedure. Results: A decrease in pain (scored on an NRS) and a decrease in dynamic knee instability mediated the effect of wearing a soft knee brace on the reduction of activity limitations (P < 0.05), while changes in proprioception and PPT did not mediate this effect (P > 0.05). Conclusion: This study shows that decreased pain and reduced dynamic knee instability are pathways by which wearing a soft knee brace decreases activity limitations in patients with knee OA.