Smad4 is the central intracellular mediator of transforming growth factor-beta (TGF-beta) signals. To study the role of Smad4 in skeletal development, we introduced a conditional mutation of the gene in chondrocytes using Cre--loxP system. We showed that Smad4 was expressed strongly in prehypertrophic and hypertrophic chondrocytes. The abrogation of Smad4 in chondrocytes resulted in dwarfism with a severely disorganized growth plate characterized by expanded resting zone of chondrocytes, reduced chondrocyte proliferation, accelerated hypertrophic differentiation, increased apoptosis and ectopic bone collars in perichondrium. Meanwhile, Smad4 mutant mice exhibited decreased expression of molecules in Indian hedgehog/parathyroid hormone-related protein (Ihh/PTHrP) signaling. The cultured mutant metatarsal bones failed to response to TGF-beta1, while the hypertrophic differentiation was largely inhibited by Sonic hedgehog (Shh). This indicated that Ihh/PTHrP inhibited the hypertrophic differentiation of chondrocytes independent of the Smad4-mediated TGF-beta signals. All these data provided the first genetic evidence demonstrating that Smad4-mediated TGF-beta signals inhibit the chondrocyte hypertrophic differentiation, and are required for maintaining the normal organization of chondrocytes in the growth plate.