Nell-1 is a growth factor required for normal skeletal development and expression of extracellular matrix proteins required for bone and cartilage cell differentiation. We identified the transcription factor nuclear factor of activated T cells (Nfatc2) as a primary response gene of Nell-1 through a microarray screen, with validation using real-time polymerase chain reaction (PCR). We investigated the effects of recombinant Nell-1 protein on the chondrogenic cell line ATDC5 and primary mouse chondrocytes. The osteochondral transcription factor Runx2 was investigated as a possible intermediary between Nell-1 and Nfatc2 using adenoviral overexpression of wild-type and dominant-negative Runx2. Nell-1 transiently induced both transcription and translation of Nfatc2, an effect inhibited by transduction of dominant-negative Runx2, suggesting that Runx2 was necessary for Nfatc2 induction. Differentiation assays revealed inhibitory effects of Nell-1 on ATDC5 cells. Although proliferation was unaffected, expression of chondrocyte-specific genes was decreased, and cartilage nodule formation and proteoglycan accumulation were suppressed. siRNA knockdown of Nfatc2 significantly reversed these inhibitory effects. To elucidate the relationship between Nell-1, Runx2, and Nfatc2 in vivo, their presence and distribution were visualized in femurs of wild-type and Nell1-deficient mice at both neonatal and various developmental stages using immunohistochemistry. All three proteins colocalized in the perichondrium of wild-type femurs but stained weakly or were completely absent in Nell1-deficient femurs at neonatal stages. Thus Nfatc2 likely plays an important role in Nell-1-mediated osteochondral differentiation in vitro and in vivo. To our knowledge, this is the first demonstration that Nfatc2 is a primary response gene of Nell-1. © 2011 American Society for Bone and Mineral Research.