Loss of function mutations in the gene encoding the heparan sulfate proteoglycan Glypican-3 (GPC3) causes an X-linked disorder in humans known as Simpson-Golabi-Behmel Syndrome (SGBS). This disorder includes both pre- and postnatal overgrowth, a predisposition to certain childhood cancers, and a complex assortment of congenital defects including skeletal abnormalities. In this study, we have identified a previously unrecognized delay in endochondral ossification associated with the loss of Gpc3 function. Gpc3 knockout animals show a marked reduction in calcified trabecular bone, and an abnormal persistence of hypertrophic chondrocytes at embryonic day 16.5 (E16.5). These hypertrophic chondrocytes down-regulate Type X collagen mRNA expression and undergo apoptosis, suggesting a normal progression of hypertrophic chondrocyte cell fate. However, replacement of these cells by mineralized bone is delayed in association with a marked delay in the appearance of osteoclasts in the bone in vivo. This delay in vivo correlates with a significant reduction in the capacity to form osteoclasts from bone marrow macrophage precursors in vitro in response to M-CSF and RANKL, and with a reduction in the numbers of bone-marrow-derived cells expressing the markers CD11b and Gr-1. Together, these results indicate selective impairment in the development of the common hematopoietic lineage from which monocyte/macrophages and PMNs are derived. This is the first report of a requirement for heparan sulfate, and specifically Gpc3, in the lineage-specific differentiation of these cell types in vivo.