The effect of fibroblast growth factor (FGF) on mature chondrocytes, the cells responsible for axial skeletal development, is growth attenuation rather than stimulation. This singular response has been linked to signaling via FGF receptor 3 (FGFR3), partly because mutations causing chronic FGFR3 activation lead to various human disorders of bone growth. In order to study how FGF inhibits growth, we analyzed its effect on a rat chondrocyte-derived cell line. We show that the FGF-induced growth arrest occurs at the G1 phase,accompanied by profound changes in gene expression and cytoskeletal organization. Within minutes of binding, FGF induces tyrosine kinase activity in the focal substrate adhesions where it colocalizes with vinculin. Upon FGF stimulation, FGFR3 is selectively removed from the focal adhesions, which is followed by their disassembly and disruption of the organized cytoskeleton. Multiple genes are induced following FGF stimulation in chondrocytes, which has been shown by DNA array screening and confirmed for some by immunoblotting. These genes include regulators of cell differentiation and proliferation such as c-jun, JunD, cyclin-D1, NFκB1 and of plasma-membrane microdomain morphology, such as ezrin. The transcription factor Id1 is downregulated, consistent with the cells' exit from the mitotic cycle. Moreover, following FGF stimulation, levels of FGFR3 mRNA and protein decline, as does downstream signaling through the MAPK pathway. The importance of this FGFR3-mediated on-off control is illustrated in transgenic mice expressing mutant, hyperactive FGFR3, where abnormally high levels of NFκB are expressed throughout their bone growth-plates. A working model is presented of the signaling network involved in regulating FGF-induced chondrocyte differentiation and receptor downregulation.