Vertebrate skeletogenesis requires a well-coordinated transition from chondrogenesis to osteogenesis. Hypertrophic chondrocytes in the growth plate play a pivotal role in this transition. Parathyroid hormone–related peptide (PTHrP), synthesized in the periarticular growth plate, regulates the site at which hypertrophy occurs. By comparing PTH/PTHrP receptor^–/–/wild-type (PPR^–/–/wild-type) chimeric mice with Ihh^–/–;PPR^–/–/wild-type chimeric and Ihh^–/–/wild-type chimeric mice, we provide in vivo evidence that Indian hedgehog (Ihh), synthesized by prehypertrophic and hypertrophic chondrocytes, regulates the site of hypertrophic differentiation by signaling to the periarticular growth plate and also determines the site of bone collar formation in the adjacent perichondrium. By providing crucial local signals from prehypertrophic and hypertrophic chondrocytes to both chondrocytes and preosteoblasts, Ihh couples chondrogenesis to osteogenesis in endochondral bone development.