Previously, we showed that expression of a dominant-negative form of the transforming growth factor beta (TGF-beta) type II receptor in skeletal tissue resulted in increased hypertrophic differentiation in growth plate and articular chondrocytes, suggesting a role for TGF-beta in limiting terminal differentiation in vivo. Parathyroid hormone-related peptide (PTHrP) has also been demonstrated to regulate chondrocyte differentiation in vivo. Mice with targeted deletion of the PTHrP gene demonstrate increased endochondral bone formation, and misexpression of PTHrP in cartilage results in delayed bone formation due to slowed conversion of proliferative chondrocytes into hypertrophic chondrocytes. Since the development of skeletal elements requires the coordination of signals from several sources, this report tests the hypothesis that TGF-beta and PTHrP act in a common signal cascade to regulate endochondral bone formation. Mouse embryonic metatarsal bone rudiments grown in organ culture were used to demonstrate that TGF-beta inhibits several stages of endochondral bone formation, including chondrocyte proliferation, hypertrophic differentiation, and matrix mineralization. Treatment with TGF-beta1 also stimulated the expression of PTHrP mRNA. PTHrP added to cultures inhibited hypertrophic differentiation and matrix mineralization but did not affect cell proliferation. Furthermore, terminal differentiation was not inhibited by TGF-beta in metatarsal rudiments from PTHrP-null embryos; however, growth and matrix mineralization were still inhibited. The data support the model that TGF-beta acts upstream of PTHrP to regulate the rate of hypertrophic differentiation and suggest that TGF-beta has both PTHrP-dependent and PTHrP-independent effects on endochondral bone formation.