Endochondral bone formation is complex and requires the coordination of signals from several factors and multiple cell types. Thus, chondrocyte differentiation is regulated by factors synthesized by both chondrocytes and cells in the perichondrium. Previously, we showed that expression of a dominant‐negative form of the transforming growth factor β (TGF‐β) type II receptor in perichondrium/periosteum resulted in increased hypertrophic differentiation in growth plate chondrocytes, suggesting a role for TGF‐β signaling to the perichondrium in limiting terminal differentiation in vivo. Using an organ culture model, we later demonstrated that TGF‐β1 inhibits chondrocyte proliferation and hypertrophic differentiation by two separate mechanisms. Inhibition of hypertrophic differentiation was shown to be dependent on Parathyroid hormone‐related peptide (PTHrP) and expression of PTHrP mRNA was stimulated in the perichondrium after treatment with TGF‐β1. In this report, the hypothesis that the perichondrium is required for the effects of TGF‐β1 on growth and/or hypertrophic differentiation in mouse metatarsal organ cultures is tested. Treatment with TGF‐β1 inhibited expression of type X collagen mRNA in metatarsal cultures with the perichondrium intact. In contrast, hypertrophic differentiation as measured by expression of Type X collagen was not inhibited by TGF‐β1 in perichondrium‐free cultures. TGF‐β1 added to intact cultures inhibited BrdU incorporation in chondrocytes and increased incorporation in the perichondrium; however, TGF‐β1 treatment stimulated chondrocyte proliferation in metatarsals from which the perichondrium had been enzymatically removed. These results suggest that the TGF‐β1‐mediated regulation of both chondrocyte proliferation and hypertrophic differentiation is dependent upon the perichondrium. Thus, one or several factors from the perichondrium might mediate the way chondrocytes respond to TGF‐β1. © 2001 Wiley‐Liss, Inc.