It has previously been shown that the notochord grafted laterally to the neural tube enhances the differentiation of the vertebral cartilage at the expense of the derivatives of the dermomyotome. In contrast, the dorsomedial graft of a notochord inhibits cartilage differentiation of the dorsal part of the vertebra carrying the spinous process. Cartilage differentiation is preceded by the expression of transcription factors of the Pax family (Pax1/Pax9) in the ventrolateral domain and of the Msx family in the dorsal domain. The proliferation and differentiation of Msx-expressing cells in the dorsal precartilaginous domain of the vertebra are stimulated by BMP4, which acts upstream of Msx genes. It has previously been shown that the SHH protein arising from the notochord (and floor plate) is necessary for the survival and further development of Pax1/Pax9-expressing sclerotomal cells. We show here that SHH acts antagonistically to BMP4. SHH-producing cells grafted dorsally to the neural tube at E2 inhibit expression of Bmp4 and Msx genes and also inhibits the differentiation of the spinous process. We present a model that accounts for cartilage differentiation in the vertebra.