Previous work has indicated that signals from the floor plate and notochord promote chondrogenesis of the somitic mesoderm. These tissues, acting through the secreted signaling molecule Sonic hedgehog (Shh), appear to be critical for the formation of the sclerotome. Later steps in the differentiation of sclerotome into cartilage may be independent of the influence of these axial tissues. Although the signals involved in these later steps have not yet been pinpointed, there is substantial evidence that the analogous stages of limb bud chondrogenesis require bone morphogenetic protein (BMP) signaling. We show here that presomitic mesoderm (psm) cultured in the presence of Shh will differentiate into cartilage, and that the later stages of this differentiation process specifically depend on BMP signaling. We find that Shh not only acts in collaboration with BMPs to induce cartilage, but that it changes the competence of target cells to respond to BMPs. In the absence of Shh, BMP administration induces lateral plate gene expression in cultured psm. After exposure to Shh, BMP signaling no longer induces expression of lateral plate markers but now induces robust chondrogenesis in cultured psm. Shh signals are required only transiently for somitic chondrogenesis in vitro, and act to provide a window of competence during which time BMP signals can induce chondrogenic differentiation. Our findings suggest that chondrogenesis of somitic tissues can be divided into two separate phases: Shh-mediated generation of precursor cells, which are competent to initiate chondrogenesis in response to BMP signaling, and later exposure to BMPs, which act to trigger chondrogenic differentiation.