Members of the basic helix-loop-helix (bHLH) family of transcription factors have been shown to regulate growth and differentiation of numerous cell types. Cell-type-specific bHLH proteins typically form heterodimers with ubiquitous bHLH proteins, such as E12, and bind a DNA consensus sequence known as an E-box. We used the yeast two-hybrid system to screen mouse embryo cDNA libraries for cDNAs encoding novel cell-type-specific bHLH proteins that dimerize with E12. One of the cDNAs isolated encoded a novel bHLH protein, called scleraxis. During mouse embryogenesis, scleraxis transcripts were first detected between day 9.5 and 10.5 post coitum (p.c.) in the sclerotome of the somites and in mesenchymal cells in the body wall and limb buds. Subsequently, scleraxis was expressed at high levels within mesenchymal precursors of the axial and appendicular skeleton and in cranial mesenchyme in advance of chondrogenesis; its expression pattern in these cell types foreshadowed the developing skeleton. Prior to formation of the embryonic cartilaginous skeleton, scleraxis expression declined to low levels. As development proceeded, high levels of scleraxis expression became restricted to regions where cartilage and connective tissue formation take place. Scleraxis bound the E-box consensus sequence as a heterodimer with E12 and activated transcription of a reporter gene linked to its DNA-binding site. The expression pattern, DNA-binding properties and transcriptional activity of scleraxis suggest that it is a regulator of gene expression within mesenchymal cell lineages that give rise to cartilage and connective tissue.