Prior work has established that transient Shh signals from the notochord and floor plate confer a competence in somitic tissue for subsequent BMP signals to induce chondrogenesis. We have therefore proposed that Shh induces a factor(s) that renders somitic cells competent to chondrify in response to subsequent BMP signals. Recently, we have shown that forced expression of Nkx3.2, a transcriptional repressor induced by Shh, is able to confer chondrogenic competence in somites. In this work, we show that administration of Shh or forced Nkx3.2 expression induces the expression of the transcription factor Sox9 in the somitic tissue. Forced expression of Sox9 can, in turn, induce robust chondrogenesis in somitic mesoderm, provided that BMP signals are present. We have found that in the presence of BMP signals, Sox9 and Nkx3.2 induce each other's expression. Thus, Nkx3.2 may promote axial chondrogenesis by derepressing the expression of Sox9 in somitic mesoderm. Furthermore, forced expression of either Sox9 or Nkx3.2 not only activates expression of cartilage-specific genes in somitic mesoderm, but also promotes the proliferation and survival of the induced chondrocytes in the presence of BMP signals. However, unlike Nkx3.2, Sox9 is able to induce de novo cartilage formation in non-cartilage-forming tissues. Our findings suggest that Shh and BMP signals work in sequence to establish a positive regulatory loop between Sox9 and Nkx3.2, and that Sox9 can subsequently initiate the chondrocyte differentiation program in a variety of cellular environments.