Insulin treatment of mouse ATDC5 chondroprogenitors induces these cells to differentiate into mature chondrocytes. To identify novel factors that are involved in this process, we carried out mutagenesis of ATDC5 cells through retroviral insertion and isolated two mutant clones incapable of differentiation. Inverse PCR analysis of these clones revealed that the retroviral DNA was inserted into the promoter region of the Rab23 gene, resulting in increased Rab23 expression. To investigate whether an elevated level of Rab23 protein led to inhibition of chondrogenic differentiation, we characterized ATDC5 cells that either overexpress endogenous Rab23 or stably express ectopic Rab23. Our results revealed that up-regulation of Rab23 can indeed inhibit chondrogenic differentiation with a concomitant down-regulation of matrix genes such as type II collagen and aggrecan. In addition, stable small interfering RNA knockdown of Rab23 also resulted in inhibition of chondrogenic differentiation as well as down-regulation of Sox9, a master regulator of chondrogenesis. Interestingly, Sox9 expression has recently been linked to Gli1, and we found that Rab23 knockdown decreased Gli1 expression in chondrocytes. Because the phenotypes of Rab23 mutations in mice and humans include defects in cartilage and bone development, our study suggests that Rab23 is involved in the control of Sox9 expression via Gli1 protein.