Bone morphogenetic protein-2 (BMP-2), a member of the transforming growth factor-β (TGF-β) superfamily, is characterized by its ability to induce cartilage and bone formation. We have recently demonstrated that the multipotential, murine embryonic mesenchymal cell line, C3H10T1/2, when cultured at high density, is induced by BMP-2 or TGF-β1 to undergo chondrogenic differentiation. The high-cell-density requirement suggests that specific cell-cell interactions, such as those mediated by cell adhesion molecules, are important in the chondrogenic response. In view of our recent finding that N-cadherin, a Ca2+-dependent cell adhesion molecule, is functionally required in normal embryonic limb mesenchyme cellular condensation and chondrogenesis, we examine here whether N-cadherin is also involved in BMP-2 induction of chondrogenesis in C3H10T1/2 cells. BMP-2 stimulation of chondrogenesis in high-density micromass cultures of C3H10T1/2 cells was evidenced by Alcian blue staining, elevated [35S]sulfate incorporation, and expression of the cartilage matrix markers, collagen type II and cartilage proteoglycan link protein. With BMP-2 treatment, N-cadherin mRNA expression was stimulated 4-fold within 24 h, and by day 5, protein levels were stimulated 8-fold. An N-cadherin peptidomimic containing the His-Ala-Val sequence to abrogate homotypic N-cadherin interactions inhibited chondrogenesis in a concentration-dependent manner. To analyze the functional role of N-cadherin further, C3H10T1/2 cells were stably transfected with expression constructs of either full-length N-cadherin or a dominant negative, N-terminal deletion mutant of N-cadherin. Moderate (2-fold) overexpression of full-length N-cadherin augmented, whereas higher (4-fold) overexpression inhibited the BMP-2-chondrogenic effect. On the other hand, expression of the dominant negative N-cadherin mutant dramatically inhibited BMP-2 stimulated chondrogenesis. These data strongly suggest that upregulation of N-cadherin expression, at defined critical levels, is a candidate mechanistic component of BMP-2 stimulation of mesenchymal chondrogenesis.