Runx2, a transcription factor known to be essential for osteoblast maturation and skeletogenesis, is also expressed in pre-cartilaginous mesenchymal condensations in the developing embryo. It is therefore necessary to understand the control and consequential regulatory activity of the Runx2 gene within the context of chondrogenic differentiation of a mesenchymal progenitor cell. We identify the homeodomain protein Nkx3.2 as a potent sequence-specific repressor of the Runx2 promoter that acts through a regulatory element 0.1 kb upstream from the site of transcriptional initiation. The biological significance of this repression is established by utilizing bone morphogenic protein 2 (BMP-2)-induced chondrogenic differentiation of pluripotent C3H10T1/2 cells as a model for the initial events of mesenchymal chondrogenesis. We demonstrate that induction of the chondrogenic phenotype and endogenous Nkx3.2 expression is accompanied by a repression of Runx2 gene activity. Bypassing Runx2 repression by adenoviral-mediated introduction of Runx2 into C3H10T1/2 cells can prevent the induction of chondrogenesis, but cannot reverse the chondrogenic phenotype once it has been initiated, as evidenced by Sox9 and type II collagen expression and extracellular matrix deposition. Our results demonstrate that Runx2 is a direct transcriptional target of Nkx3.2, and that repression of Runx2 at the onset of chondrogenesis is a prerequisite for the activation of a chondrocyte-specific program of gene expression. We postulate that Runx2 is a critical link in BMP-2-mediated initiation of mesenchymal chondrogenesis that results in activation of Sox9 at least in part through the Nkx3.2-dependent repression of Runx2.