Mesenchymal stem cells (MSCs) are potentially useful cells for musculoskeletal tissue engineering. However, controlling MSC differentiation and tissue formation in vivo remains a challenge. There is a significant need for well-defined and efficient protocols for directing MSC behaviors in vivo. We hypothesize that morphogenetic signals from chondrocytes may regulate MSC differentiation. In micromass culture of MSCs, incubation with chondrocyte-conditioned medium (CCM) significantly enhanced the production of cartilage specific matrix including type II collagen. In addition, incubation of MSCs with conditioned medium supplemented with osteogenic factors induced more osteogenesis and accumulation of calcium and increased ALP activity. These findings reveal that chondrocyte-secreted factors promote chondrogenesis as well as osteogenesis of MSCs during in vitro micromass culture. Moreover, when MSCs expanded with chondrocyte-conditioned medium were encapsulated in hydrogels and subsequently implanted into athymic mice, basophilic extracellular matrix deposition characteristic of neocartilage was evident. These results indicate that articular chondrocytes produce suitable morphogenetic factors that induce the differentiation program of MSCs in vitro and in vivo.