The development of endochondral bones requires the dination of signals from several cell types within the cartilage rudiment. A signaling cascade involving Indian hedgehog (Ihh) and parathyroid hormone related peptide (PTHrP) has been described in which hypertrophic differentiation is limited by a signal secreted from chondrocytes as they become committed to hypertrophy. In this negative-feedback loop, Ihh inhibits hypertrophic differentiation by regulating the expression of Pthrp, which in turn acts directly on chondrocytes in the growth plate that express the PTH/PTHrP receptor. Previously, we have shown that PTHrP also acts downstream of transforming growth factor β (TGFβ) in a common signaling cascade to regulate hypertrophic differentiation in embryonic mouse metatarsal organ cultures. As members of the TGFβ superfamily have been shown to mediate the effects of Hedgehog in several developmental systems, we proposed a model where TGFβ acts downstream of Ihh and upstream of PTHrP in a cascade of signals that regulate hypertrophic differentiation in the growth plate. This report tests the hypothesis that TGFβ signaling is required for the effects of Hedgehog on hypertrophic differentiation and expression of Pthrp. We show that Sonic hedgehog (Shh), a functional substitute for Ihh, stimulates expression of Tgfb2 and Tgfb3 mRNA in the perichondrium of embryonic mouse metatarsal bones grown in organ cultures and that TGFβ signaling in the perichondrium is required for inhibition of differentiation and regulation of Pthrp expression by Shh. The effects of Shh are specifically dependent on TGFβ2, as cultures from Tgfb3-null embryos respond to Shh but cultures from Tgfb2-null embryos do not. Taken together, these data suggest that TGFβ2 acts as a signal relay between Ihh and PTHrP in the regulation of cartilage hypertrophic differentiation.