Normal development of the growth plate requires coordinated proliferation and differentiation of chondrocytes and osteoblasts. In previous work, we have shown that Indian hedgehog (IHH), produced by prehypertrophic and hypertrophic chondrocytes, stimulates production of parathyroid hormone‐related protein (PTHrP) by perichondrial and early chondrocytic cells. PTHrP then maintains chondrocytes in a proliferative, less differentiated state. Because this less differentiated state delays the production of IHH, IHH and PTHrP may participate in a negative feedback loop that synchronizes and determines the pace of differentiation of chondrocytes in the growth plate. To establish the roles of physiological levels of PTHrP and IHH, we have now injected PTH/PTHrP receptor (—/—) embryonic stem (ES) cells into normal blastocysts to generate mice with chimeric growth plates. The PTH/PTHrP receptor cells leave the proliferative cycle and differentiate prematurely in the middle of the normal proliferative columns. The columns of wild‐type cells are longer than normal and the adjacent bone collar is also longer than normal. Patterns of gene expression and the use of chimeras using PTH/PTHrP receptor (—/—); IHH (—/—) ES cells suggest that modified patterns of IHH and PTHrP synthesis explain these abnormalities. Thus, IHH is a master regulator of both chondrocyte and osteoblast differentiation.