Endochondral bone formation in vertebrates requires precise coordination between proliferation and differentiation of the participating chondrocytes. We examined the role of perichondrium in this process using an organ culture system of chicken embryonic tibiotarsi. A monoclonal antibody against chicken collagen type X, specifically expressed by hypertrophic chondrocytes, was utilized to monitor the terminal differentiation of chondrocytes. Proliferation of chondrocytes was examined by a BrdU-labeling procedure. The absence of perichondrium is correlated with an extended zone of cartilage expressing collagen type X, suggesting that the perichondrium regulates chondrocyte hypertrophy in a negative manner. Removal of perichondrium, in addition, resulted in an extended zone of chondrocytes incorporating BrdU, indicating that the perichondrium also negatively regulates the proliferation of chondrocytes. Partial removal of perichondrium from one side of the tibiotarsus led to expansion of both the collagen type X-positive domain and the BrdU-positive zone at the site of removal but not where the perichondrium remained intact. This suggests that both types of regulation by the perichondrium are local effects. Furthermore, addition of bovine parathyroid hormone (PTH) to perichondrium-free cultures reversed the expansion of the collagen type X-positive domain but not that of the proliferative zone. This suggests that the regulation of differentiation is dependent upon the PTH/PTHrP receptor and that the regulation of proliferation is likely independent of it. Taken together, these results are consistent with a model where perichondrium regulates both the exit of chondrocytes from the cell cycle, and their subsequent differentiation.