The most well-characterized intracellular signaling molecules for transforming growth factor-beta (TGF-β) are the Smads. R-Smads interact with and are phosphorylated directly by the TGF-β type I receptor. Phosphorylated R-Smads can then associate with Smad4, translocate to the nucleus and regulate transcription. Specific R-Smads transduce distinct signals for members of the TGF-β superfamily. Smad2 and -3 mediate signaling by TGF-β/activin, whereas Smad1, -5, and -8 mediate bone morphogenetic protein signaling. TGF-β inhibits proliferation and hypertrophic differentiation in metatarsal organ cultures by a perichondrium-dependent mechanism. To determine the mechanism of TGF-β signaling in the perichondrium, we tested the hypothesis that TGF-β-restricted Smad2 and Smad3 regulate chondrocyte proliferation and differentiation in embryonic metatarsal organ cultures. Perichondrium was infected with adenoviruses containing dominant-negative forms of Smad2 (Ad-Smad2-3SA) and Smad3 (Ad-Smad3ΔC). Proliferation and differentiation were measured in response to treatment with TGF-β1. Results were compared with control bones infected with a β-galactosidase reporter virus (Ad-β-gal). Infection with Ad-Smad2-3SA completely blocked the effects of TGF-β1 on metatarsal development while Ad-Smad3ΔC only partially blocked TGF-β1 effects. To further characterize the role of Smad3 in long bone development, TGF-β1 responsiveness in cultures from Smad3+/+ and Smad3ex8/ex8 mice were compared. Loss of Smad3 only partially blocked the effects of TGF-β1 on differentiation. In contrast, the effects of TGF-β1 on chondrocyte proliferation were blocked completely. We conclude that Smad2 signaling in the perichondrium can compensate for the loss of Smad3 to regulate inhibition of hypertrophic differentiation; however, Smad3 is required for TGF-β1-mediated effects on proliferation. © 2004 Wiley-Liss, Inc.