The growth arrest and DNA damage-inducible 45beta (GADD45beta) gene product has been implicated in the stress response, cell cycle arrest, and apoptosis. Here we demonstrated the unexpected expression of GADD45beta in the embryonic growth plate and uncovered its novel role as an essential mediator of matrix metalloproteinase-13 (MMP-13) expression during terminal chondrocyte differentiation. We identified GADD45beta as a prominent early response gene induced by bone morphogenetic protein-2 (BMP-2) through a Smad1/Runx2-dependent pathway. Because this pathway is involved in skeletal development, we examined mouse embryonic growth plates, and we observed expression of Gadd45beta mRNA coincident with Runx2 protein in pre-hypertrophic chondrocytes, whereas GADD45beta protein was localized prominently in the nucleus in late stage hypertrophic chondrocytes where Mmp-13 mRNA was expressed. In Gadd45beta(-/-) mouse embryos, defective mineralization and decreased bone growth accompanied deficient Mmp-13 and Col10a1 gene expression in the hypertrophic zone. Transduction of small interfering RNA-GADD45beta in epiphyseal chondrocytes in vitro blocked terminal differentiation and the associated expression of Mmp-13 and Col10a1 mRNA in vitro. Finally, GADD45beta stimulated MMP-13 promoter activity in chondrocytes through the JNK-mediated phosphorylation of JunD, partnered with Fra2, in synergy with Runx2. These observations indicated that GADD45beta plays an essential role during chondrocyte terminal differentiation.