Loss of PTPN11/SHP2 in mice or in human metachondromatosis (MC) patients causes benign cartilage tumors on the bone surface (exostoses) and within bones (enchondromas). To elucidate the mechanisms underlying cartilage tumor formation, we investigated the role of SHP2 in the specification, maturation and organization of chondrocytes. Firstly, we studied chondrocyte maturation by performing RNA-seq on primary chondrocyte pellet cultures. We found that SHP2 depletion, or inhibition of the ERK1/2 pathway, delays the terminal differentiation of chondrocytes from the early-hypertrophic to the late-hypertrophic stage. Secondly, we studied chondrocyte maturation and organization in mice with a mosaic postnatal inactivation of Ptpn11 in chondrocytes. We found that the vertebral growth plates of these mice have expanded domains of early-hypertrophic chondrocytes that have not yet terminally differentiated, and their enchondroma-like lesions arise from chondrocytes displaced from the growth plate due to a disruption in the organization of maturation and ossification zones. Furthermore, we observed that lesions from human MC patients also display disorganized chondrocyte maturation zones. Next, we found that inactivation of Ptpn11 in Fsp1-Cre-expressing fibroblasts induces exostosis-like outgrowths, suggesting that loss of SHP2 in cells on the bone surface and at bone-ligament attachment sites induces ectopic chondrogenesis. Finally, we performed lineage tracing to show that exostoses and enchondromas in mice likely contain mixtures of wild-type and SHP2-deficient chondrocytes. Together, these data indicate that in patients with MC, who are heterozygous for inherited PTPN11 loss-of-function mutations, second-hit mutations in PTPN11 can induce enchondromas by disrupting the organization and delaying the terminal differentiation of growth plate chondrocytes, and can induce exostoses by causing ectopic chondrogenesis of cells on the bone surface. Furthermore, the data are consistent with paracrine signaling from SHP2-deficient cells causing SHP2-sufficient cells to be incorporated into the lesions.