Glucocorticoids are important regulators of bone cell differentiation and mesenchymal lineage commitment. Using a cell-specific approach of osteoblast-targeted transgenic disruption of intracellular glucocorticoid signaling, we discovered a novel molecular pathway by which glucocorticoids, mainly through the mature osteoblast, regulate the cellular mechanisms that govern cranial skeleton development. Embryonic and neonatal transgenic mice revealed a distinct phenotype characterized by hypoplasia and osteopenia of the cranial skeleton; disorganized frontal, parietal and interparietal bones; increased suture patency; ectopic differentiation of cartilage in the sagittal suture; and disturbed postnatal removal of parietal cartilage. Concurrently, expression of Mmp14, an enzyme essential for calvarial cartilage removal, was markedly reduced in parietal bone and cartilage of transgenic animals. Expression of Wnt9a and Wnt10b was significantly reduced in osteoblasts with disrupted glucocorticoid signaling, and accumulation of beta-catenin, the upstream regulator of Mmp14 expression, was decreased in osteoblasts, chondrocytes and mesenchymal progenitors of transgenic mice. Supracalvarial injection of Wnt3a protein rescued the transgenic cranial phenotype. These results define novel roles for glucocorticoids in skeletal development and delineate how osteoblasts--under steroid hormone control--orchestrate the intricate process of intramembranous bone formation by directing mesenchymal cell commitment towards osteoblastic differentiation while simultaneously initiating and controlling cartilage dissolution in the postnatal mouse.