Indian hedgehog (Ihh), one of the hedgehog gene families, is indicated in the regulation of chondrocyte differentiation. Tougu Xiaotong formula (TXF), a traditional Chinese medicinal compound, has been used for the treatment of bone and joint disease. However, the underlying molecular mechanisms of TXF on the function of bone marrow stromal cells (BMSCs) remain unclear. In the present study, the affect of TXF on proliferation and chondrogenic differentiation was investigated in primary BMSCs from four‑week‑old Sprague Dawley rats. The cell viability in BMSCs treated with TXF was higher compared to the untreated cells. Additionally, the percentage of G(0)/G(1) phase cells was significantly decreased, whereas that of the S phase cells was significantly increased. Furthermore, following TXF treatment, cyclin D1, cyclin‑dependent kinase 4 (CDK4) and CDK6 expression in BMSCs was significantly enhanced. The results showed that TXF had no cytotoxicity to BMSCs. To explore the effect of TXF on the differentiation in BMSCs, whether TXF induced chondrogenic differentiation of BMSCs by the regulation of Ihh signaling pathway was investigated. The protein expression of Ihh, Patched and Smoothened in the induction group were significantly increased when compared to those in the control group, and the highest protein level of Ihh was in the induction group that was treated with the combination of TXF and transforming growth factor‑β1 (TGF‑β1). In addition, TXF combined with TGF‑β1 significantly induced the protein expression of cartilage oligomeric matrix protein and collagen II compared to the TGF‑β1 group. Taken together, these results indicate that TXF promotes the proliferation via accelerating the G(1)/S transition, and induces chondrogenic differentiation in BMSCs by activation of the Ihh signaling pathway in association with TGF‑β1.