Growth plate chondrocytes undergo a tightly regulated process of differentiation, allowing for the longitudinal growth of bones. Although it is known that parathyroid hormone related protein (PTHrP) and Indian hedgehog regulate the differentiation of growth plate chondrocytes, how these pathways interact to regulate chondrocyte development is not fully elucidated. We examined how the interaction between PTHrP and the hedgehog activated transcription factors, Gli2 and Gli3, regulates growth plate chondrocyte differentiation and proliferation. Analysis of fetal limbs showed that Gli2 is a negative regulator and Gli3 a positive regulator of type X collagen expression. Limb explant cultures showed that PTHrP treatment inhibited type X collagen expression and increased chondrocyte proliferation. This effect was substantially enhanced in Gli2-/- limbs, was blocked in Gli3-/- limbs, and was only partially inhibited by hedgehog ligand blockade. PTHrP negatively regulated Gli mediated transcription in cell cultures, and regulated the level of the repressor form of Gli3 in a PKA dependent manner. These results show that PTHrP regulates growth plate chondrocyte proliferation and differentiation in part through the activity of Gli3, suggesting a crucial role for Gli3 in growth plate chondrocyte development.