Several genetic forms of human dwarfism have been linked to activating mutations in FGF receptor 3, indicating that FGF signaling has a critical role in chondrocyte maturation and skeletal development. However, the mechanisms through which FGFs affect chondrocyte proliferation and differentiation remain poorly understood. We show here that activation of FGF signaling inhibits chondrocyte proliferation both in a rat chondrosarcoma (RCS) cell line and in primary murine chondrocytes. FGF treatment of RCS cells induces phosphorylation of STAT-1, its translocation to the nucleus, and an increase in the expression of the cell-cycle inhibitor p21WAF1/CIP1. We have used primary chondrocytes from STAT-1 knock-out mice to provide genetic evidence that STAT-1 function is required for the FGF mediated growth inhibition. Furthermore, FGF treatment of metatarsal rudiments from wild-type and STAT-1^−/− murine embryos produces a drastic impairment of chondrocyte proliferation and bone development in wild-type, but not in STAT-1^−/−rudiments. We propose that STAT-1 mediated down regulation of chondrocyte proliferation by FGF signaling is an homeostatic mechanism which ensures harmonious bone development and morphogenesis.