Histological distinction between enchondroma and chondrosarcoma is difficult because of a lack of definitive biomarkers. Here, we found highly active transforming growth factor-β (TGF-β) and bone morphogenetic protein (BMP) signalling in human chondrosarcomas compared with enchondromas by immunohistochemistry of phosphorylated SMAD3 and SMAD1/5. In contrast, the chondrogenic master regulator SOX9 was dramatically down-regulated in grade 1 chondrosarcoma. Paternally expressed gene 10 (PEG10) was identified by microarray analysis as a gene overexpressed in chondrosarcoma SW1353 and Hs 819.T cells compared with C28/I2 normal chondrocytes, while TGF-β1 treatment, mimicking higher grade tumour conditions, suppressed PEG10 expression. Enchondroma samples exhibited stronger expression of PEG10 compared with chondrosarcomas, suggesting a negative association of PEG10 with malignant cartilage tumours. In chondrosarcoma cell lines, application of the TGF-β signalling inhibitor, SB431542, increased the protein level of PEG10. Reporter assays revealed that PEG10 repressed TGF-β and BMP signalling, which are both SMAD pathways, whereas PEG10 knockdown increased the level of phosphorylated SMAD3 and SMAD1/5/9. Our results indicate that mutually exclusive expression of PEG10 and phosphorylated SMADs in combination with differentially expressed SOX9 is an index to distinguish between enchondroma and chondrosarcoma, while PEG10 and TGF-β signalling are mutually inhibitory in chondrosarcoma cells.