Signaling by fibroblast growth factor (FGF) 18 and FGF receptor 3 (FGFR3) have been shown to regulate proliferation, differentiation, and matrix production of articular and growth plate chondrocytes in vivo and in vitro. Notably, the congenital absence of either FGF18 or FGFR3 resulted in similar expansion of the growth plates of fetal mice and the addition of FGF18 to human articular chondrocytes in culture enhanced proliferation and matrix production. Based on these and other experiments it has been proposed that FGF18 signals through FGFR3 to promote cartilage production by chondrocytes. Its role in chondrogenesis remains to be defined. In the current work we used the limb buds of FGFR3(+/+) and FGFR3(-/-) embryonic mice as a source of mesenchymal cells to determine how FGF18 signaling affects chondrogenesis. Confocal laser-scanning microscopy demonstrated impaired cartilage nodule formation in the FGFR3(-/-) cultures. Potential contributing factors to the phenotype were identified as impaired mitogenic response to FGF18, decreased production of type II collagen and proteoglycan in response to FGF18 stimulation, impaired interactions with the extracellular matrix resulting from altered integrin receptor expression, and altered expression of FGFR1 and FGFR2. The data identified FGF18 as a selective ligand for FGFR3 in limb bud mesenchymal cells, which suppressed proliferation and promoted their differentiation and production of cartilage matrix. This work, thus, identifies FGF18 and FGFR3 as potential molecular targets for intervention in tissue engineering aimed at cartilage repair and regeneration of damaged cartilage.