Bone morphogenetic proteins (BMPs) play diverse roles in many aspects of skeletal development and bone homeostasis. During endochondral ossification, tight regulation of BMP activity is required to assure proper survival, proliferation and differentiation of skeletal progenitor cells into chondrocytes and osteoblasts. BMP3, a structurally divergent member of the BMP family, acts as a negative regulator of bone formation by limiting BMP signal transduction. In this study, we focus on the chick limb where we find BMP3 has a unique localization pattern with strong expression in the developing perichondrium. Overexpression of BMP3 in chick wing bud at the onset of chondrogenesis, using replication competent retrovirus, reduces BMP signaling leading to increased cell proliferation and delayed cell differentiation, resulting in expanded skeletal elements and joint fusions. Our results suggest that BMP3 expression in the perichondrium may serve to regulate cartilage cell proliferation by modulating the levels of BMP signaling, thus ensuring proper endochondral ossification. Developmental Dynamics 237:1691–1698, 2008. © 2008 Wiley-Liss, Inc.