Peri-cellular remodeling of mesenchymal extracellular matrices is considered a prerequisite for cell proliferation, motility and development. Here we demonstrate that membrane-type 3 MMP, MT3-MMP, is expressed in mesenchymal tissues of the skeleton and in peri-skeletal soft connective tissue. Consistent with this localization, MT3-MMP-deficient mice display growth inhibition tied to a decreased viability of mesenchymal cells in skeletal tissues. We document that MT3-MMP works as a major collagenolytic enzyme, enabling cartilage and bone cells to cleave high-density fibrillar collagen and modulate their resident matrix to make it permissive for proliferation and migration. Collectively, these data uncover a novel extracellular matrix remodeling mechanism required for proper function of mesenchymal cells. The physiological significance of MT3-MMP is highlighted in mice double deficient for MT1-MMP and MT3-MMP. Double deficiency transcends the combined effects of the individual single deficiencies and leads to severe embryonic defects in palatogenesis and bone formation incompatible with life. These defects are directly tied to loss of indispensable collagenolytic activities required in collagen-rich mesenchymal tissues for extracellular matrix remodeling and cell proliferation during embryogenesis.