Endochondral ossification begins from the condensation and differentiation of mesenchymal cells into cartilage. The cartilage then goes through a program of cell proliferation, hypertrophic differentiation, calcification, apoptosis, and eventually is replaced by bone. Unlike most cartilage, articular cartilage is arrested before terminal hypertrophic differentiation. In this study, we showed that TGF-beta/Smad3 signals inhibit terminal hypertrophic differentiation of chondrocyte and are essential for maintaining articular cartilage. Mutant mice homozygous for a targeted disruption of Smad3 exon 8 (Smad3(ex8/ex8)) developed degenerative joint disease resembling human osteoarthritis, as characterized by progressive loss of articular cartilage, formation of large osteophytes, decreased production of proteoglycans, and abnormally increased number of type X collagen-expressing chondrocytes in synovial joints. Enhanced terminal differentiation of epiphyseal growth plate chondrocytes was also observed in mutant mice shortly after weaning. In an in vitro embryonic metatarsal rudiment culture system, we found that TGF-beta1 significantly inhibits chondrocyte differentiation of wild-type metatarsal rudiments. However, this inhibition is diminished in metatarsal bones isolated from Smad3(ex8/ex8) mice. These data suggest that TGF-beta/Smad3 signals are essential for repressing articular chondrocyte differentiation. Without these inhibition signals, chondrocytes break quiescent state and undergo abnormal terminal differentiation, ultimately leading to osteoarthritis.