We reported earlier that an interferon-inducible p204 protein serves as a cofactor of Cbfa1 and promotes osteogenesis. Here we establish that p204 demonstrates prominent expression in growth plate chondrocytes. It is differentially expressed in the course of bone morphogenetic protein-2-triggered chondrocyte differentiation of pluripotent C3H10T1/2 cells. This expression is probably due to the activation of p204 gene by Cbfa1 and repression by Sox5 transcription factor. Cbfa1 and Sox5 bind to the 5'-flanking regulatory region of p204 gene at their consensus binding elements. Overexpression of p204 accelerates chondrocyte hypertrophy, as revealed by enhanced expression of type X Collagen and matrix metalloproteinase-13; however, knockdown of p204 via an siRNA approach abolishes hypertrophic chondrocyte differentiation. p204 acts as a cofactor of Cbfa1 in chondrocyte hypertrophy: (1) overexpression of p204 augments, whereas suppression of p204 decreases, the Cbfa1-dependent transactivation of a Collagen X-specific reporter gene; (2) p204 enhances Cbfa1-mediated chondrocyte hypertrophy; and (3) p204 associates with Cbfa1 in chondrocyte differentiation. In addition, altered expression of p204 in chondrocyte hypertrophy was accompanied by altered levels of Indian hedgehog (IHH) and parathyroid hormone/parathyroid hormone-related peptide receptor-1 (PTHR1). Collectively, p204 is a novel regulator of chondrocyte differentiation by (1) acting as a coactivator of Cbfa1 and (2) affecting IHH/PTPrP signaling.