Reduction of intercellular spaces in the areas of prospective cartilage and bone formation (precartilage condensation) precedes chondrogenesis and may represent an important step in the process of cartilage differentiation during limb skeletogenesis. We have attempted to clarify the role of the microenvironment established during cell condensation, taking advantage of a tissue culture model system that allows condensation (i.e., increased cell density due to cell aggregation) and chondrogenic differentiation (i.e., synthesis of cartilage-specific extracellular matrix proteins, such as type II collagen and acquisition of a chondrocyte morphology) of chick embryo cartilage-derived undifferentiated cells. To prevent condensation cells were grown in carboxymethylcellulose and changes in the differentiation pathway were evaluated. In another series of experiments, we have separated single cells from the aggregated cells and analyzed their differentiation properties. Morphological analyses and the evaluation of type II collagen expression, at both the protein and the mRNA level, show that a reduced rate of cell clustering and cell to cell contact parallels a reduction of cell recruitment into the differentiation program. On the basis of our results, we suggest that the following cascade of events regulates the early stages of chondrocyte differentiation: (a) the acquisition of the ability to establish cell to cell contacts, (b) the formation of a permissive environment capable of activating the differentiation program, and (c) the expression of differentiation markers.