Chondrogenic differentiation of mesenchymal cells is generally thought to be initiated by the inductive action of specific growth factors and depends on intimate cell-cell interactions. In this study, we have used multipotential murine C3H10T1/2 cells to analyze the effect and mechanism of action of bone morphogenetic protein 2 (BMP-2) on chondrogenesis. C3H10T1/2 cells have been previously shown to undergo multiple differentiation pathways. While chondrogenesis, osteogenesis, myogenesis and adipogenesis have been observed, chondrocytes appear significantly less frequently than the other cell types, and the appearance of chondrocytes exclusive of the other cell types has not been observed. We report here that the appearance of chondrocytes in C3H10T1/2 cells is markedly enhanced as a result of culture under conditions favorable for chondrogenesis, i.e. plating as high-density micromass and treatment with BMP-2. Such cultures contain chondrocyte-like cells, elaborate an Alcian blue stained cartilage-like matrix, express link protein and type II collagen, both cartilage matrix markers, and show increased [35S]sulfate incorporation. The appearance of Alcian blue positive material and increased sulfate incorporation are dependent on the dose of BMP-2, culture time, and cell plating density of the micromass cultures. Differentiation of cells within the micromass was specific to the chondrogenic lineage, as alkaline phosphatase staining revealed only faint staining in the micromass at the highest BMP-2 concentration. The importance of enhanced cell-cell interaction in the chondroinductive effects of BMP-2 on high-density C3H10T1/2 cultures was further implicated by the additional promotion of chondrogenesis in the presence of the polycationic compound, poly-L-lysine, which has been previously reported to enhance cellular interactions and chondrogenesis in embryonic limb mesenchymal cells. Taken together, these findings suggest that chondrogenesis in C3H10T1/2 cells is inducible by BMP-2 and requires cell-cell interaction.