Among the many factors involved in regulation of chondrogenesis, bone morphogenetic proteins (BMPs) and members of the Sox and homeobox transcription factor families have been shown to have crucial roles. Of these regulators, the homeobox transcription factors that function during chondrogenesis have been the least well defined. We show here that the homeobox transcription factor Barx2 is expressed in primary mesenchymal condensations, digital rays, developing joints and articular cartilage of the developing limb, suggesting that it plays a role in chondrogenesis. Using retroviruses and antisense oligonucleotides to manipulate Barx2 expression in limb bud micromass cultures, we determined that Barx2 is necessary for mesenchymal aggregation and chondrogenic differentiation. In accordance with these findings, Barx2 regulates the expression of several genes encoding cell-adhesion molecules and extracellular matrix proteins, including NCAM and collagen II (Col2a1) in the limb bud. Barx2 bound to elements within the cartilage-specific Col2a1 enhancer, and this binding was reduced by addition of Barx2 or Sox9 antibodies, or by mutation of a HMG box adjacent to the Barx2-binding element, suggesting cooperation between Barx2 and Sox proteins. Moreover, both Barx2 and Sox9 occupy Col2a1 enhancer during chondrogenesis in vivo. We also found that two members of the BMP family that are crucial for chondrogenesis, GDF5 and BMP4, regulate the pattern of Barx2 expression in developing limbs. Based on these data, we suggest that Barx2 acts downstream of BMP signaling and in concert with Sox proteins to regulate chondrogenesis.