Bone morphogenetic proteins (BMPs) play critical roles at various stages in endochondral bone formation. In vitro studies have demonstrated that Smad7 regulates transforming growth factor-beta and BMP signals by inhibiting Smad pathways in chondrocytes. However, the in vivo roles of Smad7 during cartilage development are unknown. To investigate distinct effects of Smad7 at different stages during chondrocyte differentiation, we generated a series of conditional transgenic mice that overexpress Smad7 in chondrocytes at various steps of differentiation by using the Cre/loxP system. We generated Col11a2-lacZ(floxed)-Smad7 transgenic mice and mated them with three types of Cre transgenic mice to obtain Smad7(Prx1), Smad7(11Enh), and Smad7(11Prom) conditional transgenic mice. Smad7(Prx1) mice overexpressing Smad7 in condensing mesenchymal cells showed disturbed mesenchymal condensation associated with decreased Sox9 expression, leading to poor cartilage formation. Smad7(11Enh) mice overexpressing Smad7 in round chondrocytes showed decreased chondrocyte proliferation rates. Smad7(11Prom) mice overexpressing Smad7 in flat chondrocytes showed inhibited maturation of chondrocytes toward hypertrophy. Micromass culture of mesenchymal cells showed that BMP-induced cartilaginous nodule formation was down-regulated by overexpression of Smad7, but not Smad6. Overexpression of Smad7, but not Smad6, down-regulated the phosphorylation of p38 MAPKs. Our data provide in vivo evidence for distinct effects of Smad7 at different stages during chondrocyte differentiation and suggest that Smad7 in prechondrogenic cells inhibits chondrocyte differentiation possibly by down-regulating BMP-activated p38 MAPK pathways.