Chondrogenesis is a critical step in palatogenesis. All-trans retinoic acid (atRA), a vitamin A derivative, is a known teratogenic effector of cleft palate. Here, we evaluated the effects of atRA on the osteo-/chondrogenic differentiation of mouse embryonic palate mesenchymal (MEPM) cells. MEPM cells, in a high-density micromass environment, undergo active chondrogenesis in a manner analogous to that of limb-derived mesenchymal cells, and served as a valid model system to investigate the mechanisms regulating chondrogenesis during palatogenesis. atRA-treated MEPM micromass expressed relatively higher levels of osteoblastic gene markers (alkaline phosphatase and collagen type I) and lower levels of chondrocytic gene markers (collagen type II and aggrecan). As transforming growth factor-beta3 (TGF-beta3) is an essential growth factor for chondrogenesis of embryonic mesenchymal cells both in in vivo and in vitro conditions, we thereby explored the effects of atRA on TGF-beta3 signaling pathway. atRA led to an increase in mRNA expression of TGF-beta3 and an instantaneous decrease in TGF-beta type II receptor (TbetaRII) as determined by real-time RT-PCR. Further study showed that atRA inhibited phosphorylation of Smad2 and Smad3 and increased Smad7 expression. Activation of the Smad pathways by transfection with Smad7deltaC mutant or constitutively active TbetaRII retroviral vector abolished atRA-induced inhibition of chondrogenesis as indicated by Alcian blue staining, indicating that Smad signaling is essential for this response. Taken together, these data for the first time demonstrated a role for RA-induced hypochondrogenesis through regulation of the TGF-beta3 pathway and suggested a role for TbetaRII /Smad in retinoid-induced cleft palate.