Skeletal development is regulated by the coordinated activity of signaling molecules that are both produced locally by cartilage and bone cells and also circulate systemically. During embryonic development and postnatal bone remodeling, receptor tyrosine kinase (RTK) superfamily members play critical roles in the proliferation, survival, and differentiation of chondrocytes, osteoblasts, osteoclasts, and other bone cells. Recently, several molecules that regulate RTK signaling have been identified, including the four members of the Sprouty (Spry) family (Spry1–4). We report that Spry2 plays an important role in regulation of endochondral bone formation. Mice in which the Spry2 gene has been deleted have defective chondrogenesis and endochondral bone formation, with a postnatal decrease in skeletal size and trabecular bone mass. In these constitutive Spry2 mutants, both chondrocytes and osteoblasts undergo increased cell proliferation and impaired terminal differentiation. Tissue-specific Spry2 deletion by either osteoblast- (Col1-Cre) or chondrocyte- (Col2-Cre) specific drivers led to decreased relative bone mass, demonstrating the critical role of Spry2 in both cell types. Molecular analyses of signaling pathways in Spry2−/− mice revealed an unexpected upregulation of BMP signaling and decrease in RTK signaling. These results identify Spry2 as a critical regulator of endochondral bone formation that modulates signaling in both osteoblast and chondrocyte lineages.