The generation of the paraxial skeleton requires that commitment and differentiation of skeletal progenitors is precisely coordinated during limb outgrowth. Several signaling molecules have been identified that are important in specifying the pattern of these skeletal primordia. Very little is known, however, about the mechanisms regulating the differentiation of limb mesenchyme into chondrocytes. Overexpression of RARα in transgenic animals interferes with chondrogenesis and leads to appendicular skeletal defects (Cash, D.E., C.B. Bock, K. Schughart, E. Linney, and T.M. Underhill. 1997. J. Cell Biol. 136:445–457). Further analysis of these animals shows that expression of the transgene in chondroprogenitors maintains a prechondrogenic phenotype and prevents chondroblast differentiation even in the presence of BMPs, which are known stimulators of cartilage formation. Moreover, an RAR antagonist accelerates chondroblast differentiation as demonstrated by the emergence of collagen type II–expressing cells much earlier than in control or BMP-treated cultures. Addition of Noggin to limb mesenchyme cultures inhibits cartilage formation and the appearance of precartilaginous condensations. In contrast, abrogation of retinoid signaling is sufficient to induce the expression of the chondroblastic phenotype in the presence of Noggin. These findings show that BMP and RAR-signaling pathways appear to operate independently to coordinate skeletal development, and that retinoid signaling can function in a BMP-independent manner to induce cartilage formation. Thus, retinoid signaling appears to play a novel and unexpected role in skeletogenesis by regulating the emergence of chondroblasts from skeletal progenitors.