The ESET (also called SETDB1) protein contains an N-terminal tudor domain that mediates protein-protein interactions and a C-terminal SET domain that catalyzes methylation of histone H3 at lysine 9. We report here that ESET protein is transiently upregulated in prehypertrophic chondrocytes in newborn mice. To investigate the in vivo effects of ESET on chondrocyte differentiation, we generated conditional knockout mice to specifically eliminate the catalytic SET domain of ESET protein only in mesenchymal cells. Such deletion of the ESET gene caused acceleration of chondrocyte hypertrophy in both embryos and young animals, depleting chondrocytes that are otherwise available to form epiphyseal plates for endochondral bone growth. ESET-deficient mice are thus characterized by defective long bone growth and trabecular bone formation. To understand the underlying mechanism for ESET regulation of chondrocytes, we carried out co-expression experiments and found that ESET associates with histone deacetylase 4 to bind and inhibit the activity of Runx2, a hypertrophy-promoting transcription factor. Repression of Runx2-mediated gene transactivation by ESET is dependent on its H3-K9 methyltransferase activity as well as its associated histone deacetylase activity. In addition, knockout of ESET is associated with repression of Indian hedgehog gene in pre- and early hypertrophic chondrocytes. Together, these results provide clear evidence that ESET controls hypertrophic differentiation of growth plate chondrocytes and endochondral ossification during embryogenesis and postnatal development.