Twisted gastrulation (TSG) is an extracellular modulator of bone morphogenetic protein (BMP) activity and regulates dorsoventral axis formation in early Drosophila and Xenopus development. Studies on tsg-deficient mice also indicated a role of this protein in skeletal growth, but the mechanism of TSG activity in this process has not yet been investigated. Here we show for the first time by in situ hybridization and immunohistochemistry that TSG is strongly expressed in bovine and mouse growth plate cartilage as well as in fetal ribs, vertebral cartilage, and cartilage anlagen of the skull. Furthermore we provide evidence that TSG is directly involved in BMP-regulated chondrocyte differentiation and maturation. In vitro, TSG impaired the dose-dependent BMP-2 stimulation of collagen II and X expression in cultures of MC615 chondrocytes and primary mouse chondrocytes. In the presence of chordin, a BMP antagonist, the inhibitory effect of TSG was further enhanced. TSG also inhibited BMP-2-stimulated phosphorylation of Smad factors in chondrocytes, confirming the role of TSG as a modulator of BMP signaling. For analysis of TSG functions in cartilage development in vivo, the gene was overexpressed in transgenic mice under the control of the cartilage-specific Col2a1 promoter. As a result, Col10a1 expression was significantly reduced in the growth plates of transgenic embryos and newborns in comparison with wild type littermates as shown by in situ hybridization and by real time PCR analysis. The data suggest that TSG is an important modulator of BMP-regulated cartilage development and chondrocyte differentiation.Bone morphogenetic proteins (BMPs) 5 are key regulators in the formation of cartilage models of vertebrate long bones, vertebrae, and ribs and their transition to bone during endochondral ossification (for reviews, see Refs. 1-5). However, the role of BMP factors in cartilage development and chondrocyte differentiation is complex and differs with time and site of chondrogenic differentiation: BMPs control limb outgrowth by negatively modulating apical ectodermal ridge activity (6 -8), whereas BMPs are required for the formation of prechondrogenic mesenchyme and chondrocyte differentiation in the limb (9). The ability of BMP-2, BMP-4, and others to induce chondrogenic differentiation of undifferentiated stems cells in vivo and in vitro has been amply demonstrated (10 -12). In line with this observation is the finding that chondrogenesis in vivo is impaired by blocking BMP activities with noggin (13, 14) or deletion of the BMP receptor (BMPRIB) (15).The role of BMPs during chondrocyte maturation and hypertrophy is also complex and controversially discussed: several studies show that BMP factors such as BMP-6 and BMP-7 stimulate hypertrophic differentiation of chondrocytes and promote collagen X expression (16 -18), thus preparing growth plate cartilage for replacement by endochondral bone. On the other hand, it was reported that BMP-2 and BMP-4 overexpression in developing chick limbs caused delayed hypertroph...