Indian hedgehog (Ihh) is actively involved in endochondral bone formation. Although expression of Ihh is mostly restricted to pre‐hypertrophic chondrocytes, the role of chondrocyte‐derived Ihh in endochondral bone formation is not completely understood. To address such unresolved issues, we used the Cre/loxP approach to generate mice (Col2α1Cre; Ihh^d/Ihh^d) in which the Ihh gene was selectively ablated from collagen type II expressing cells. Mutant mice were born with the expected ratio of Mendelian inheritance, but died shortly after birth and were smaller in size, exhibiting malformed and retarded growth of limbs with severe skeletal deformities. Alizarin red S staining showed abnormal mineralization of axial and appendicular bones. Histological analysis of mutant long bones revealed abnormal endochondral bone formation with loss of a normal growth plate. In addition, in vivo bromo‐deoxyuridine (BrdU) labelling showed a marked decrease in chondrocyte proliferation. A delay in chondrocyte hypertrophy in Col2α1Cre; Ihh^d/Ihh^d mice was detected by the expression of collagen type X and osteopontin, using in situ hybridization. Furthermore, there was no expression of bone markers such as collagen type I, bone Gla protein, Runx2/Cbfa1 or PTH‐R in the perichondrium of mutant mice, indicating the absence of osteoblasts from endochondral bones. Thus, selective loss of chondrocyte‐derived Ihh recapitulated the defects in Ihh^−/− animals, providing direct in vivo evidence that Ihh not only regulates chondrocyte proliferation and differentiation but also exerts effects on osteoblast differentiation. Understanding the exact functions of the molecules involved in endochondral bone formation will form the basis for further study to determine the molecular mechanisms of skeletal diseases involving various cellular components of bone. Copyright © 2005 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.