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Indian hedgehog (Ihh), one of the three mammalian hedgehog (Hh) proteins, coordinates proliferation and differentiation of chondrocytes during endochondral bone development. Smoothened (Smo) is a transmembrane protein that transduces all Hh signals. In order to discern the direct versus indirect roles of Ihh in cartilage development, we have used the Cre-loxP approach to remove Smo activity specifically in chondrocytes. Animals generated by this means develop shorter long bones when compared to wild-type littermates. In contrast to Ihh mutants (Ihh(n)/Ihh(n)), chondrocyte differentiation proceeds normally. However, like Ihh(n)/Ihh(n) mice, proliferation of chondrocytes is reduced by about 50%, supporting a direct role for Ihh in the regulation of chondrocyte proliferation. Moreover, by overexpressing either Ihh or a constitutively active Smo allele (Smo*) specifically in the cartilage using the bigenic UAS-Gal4 system, we demonstrate that activation of the Ihh signaling pathway is sufficient to promote chondrocyte proliferation. Finally, expression of cyclin D1 is markedly downregulated when either Ihh or Smo activity is removed from chondrocytes, indicating that Ihh regulates chondrocyte proliferation at least in part by modulating the transcription of cyclin D1. Taken together, the present study establishes Ihh as a key mitogen in the endochondral skeleton.