Members of the Runx family of transcription factors play essential roles in the differentiation and development of several organ systems. Here we address the contribution of the osteoblast-related Runx gene, Runx2, to the osteogenic and chondrogenic differentiation of mesenchymal stem cells. Using a transgenic mouse model, we observe Runx2 transcription through one of its two known promoters (designated P1 in pre-cartilaginous mesenchymal condensations as early as E9.5. Runx2 gene activity is later repressed at the onset of cartilage formation, both in vivo and in vitro, necessitating examination of the regulation and function of Runx2 in mesenchymal stem cells. We demonstrate that Runx2 gene activity is repressed by the direct interaction of the homeodomain transcription factor Nkx3.2 with the proximal Runx2 P1 promoter. This repression was found to be required for the progression of BMP-induced chondrogenesis, thereby identifying Runx2 as a modulator of BMP activity in the chondrogenic as well as osteogenic differentiation program. To further understand the regulation of the Runx2 P1 promoter and to determine the contribution of P1-derived gene product, Runx2 Type II, to the formation of mineralized tissue, we have generated a Runx2 Type II-LacZ gene replacement mouse model in which the initial coding sequences and splice donor sites of the Type II isoform are replaced with the LacZ reporter gene. Activity of the endogenous P1 promoter can therefore be monitored by β-galactosidase production. Analysis of Runx2 Type II-LacZ mice demonstrates that the P1 promoter is transcriptionally most active in mature osteoblasts, but its product, Runx2 Type II is dispensable for embryonic skeletal formation. Lastly, we examine the link between growth control and osteogenic differentiation by tissue-specific deletion of the Mdm2 proto-oncogene in developing skeletal tissues of the mouse embryo. Loss of Mdm2 results in impaired bone formation, with skeletal elements exhibiting lower bone mineral content and higher porosity. Ex vivo cultures of calvarial osteoprogenitor cells exhibit severely decreased osteoblastogenesis and bone nodule formation accompanied by a failure to activate Runx2 gene activity. These findings suggest that Mdm2 is required for inhibition of p53 activity that ultimately allows for post-confluent proliferation and induction of Runx2 during maturation of the osteogenic phenotype. Taken together, our findings suggest that Runx2 modulates the commitment of progenitor cells to the osteogenic and chondrogenic lineages, and that Runx2 activity is inextricably linked to mechanisms that control cellular proliferation.