C-type natriuretic peptide (CNP) has recently been identified as a key anabolic regulator of endochondral bone growth, but the cellular and molecular mechanisms involved are incompletely understood. Although CNP has been shown to stimulate proliferation and hypertrophic differentiation of growth plate chondrocytes, it is unknown whether CNP affects the earliest stages of endochondral bone development, condensation of mesenchymal precursor cells, and chondrogenesis. Here we demonstrate that CNP increases the number of chondrogenic condensations of mouse embryonic limb bud cells in micromass culture. This is accompanied by increased expression of the cell adhesion molecule N-cadherin. In addition, CNP stimulates glycosaminoglycan synthesis as indicated by increased Alcian blue staining. However, expression of the chondrogenic transcription factors Sox9, -5, and -6 or of the main extracellular matrix genes encoding collagen II and aggrecan is not affected by CNP. Instead, we show that CNP increases expression of enzymes involved in chondroitin sulfate synthesis, a required step in the production of cartilage glycosaminoglycans. In summary, we demonstrate a novel role of CNP in promoting chondrogenesis by stimulating expression of molecules involved in cell adhesion molecules and glycosaminoglycan synthesis.