Using an in vitro model of rat epiphyseal chrondrocyte differentiation in which cells are maintained in a three-dimensional cell pellet, we show that exogenous TGF-β 1 reversibly prevents terminal differentiation of epiphyseal chondrocytes into hypertrophie cells. Through maintenance of gene expression for the cartilage matrix proteins type II collagen and aggrecan core protein, and with coordinate inhibition of expression of genes encoding the metalloproteases collagenase and stromelysin, TGF-β 1 stabilizes the phenotype of the prehypertrophic epiphyseal chondrocyte. This ability of TGF-β 1 to stabilize the cartilage phenotype is critically dependent on culture conditions. Epiphyseal chondrocytes cultured as a subconfluent monolayer of cells dedifferentiate (reduce type II collagen and aggrecan core protein expression, increase metalloprotease expression, and acquire a spindled morphology) in response to short-term TGF-β 1 treatment. Increasing the initial seeding density and allowing the cells to become multilayered prior to the addition of growth factor reverse the effects of TGF-β 1 on type II collagen and transin/stromelysin gene expression and maintain a rounded cellular morphology. This finding emphasizes the importance of considering cell density and environmental context in the analysis of the regulatory action of peptide growth factors in general and of the TGF-β s in particular. We propose that one function of TGF-β 1 during endochondral ossification is regulation of chondrocyte growth and differentiation through modulation of the relative expression of cartilage matrix proteins and metalloproteases. This function of TGF-β 1 helps illustrate how the regulation of diverse cellular processes such as matrix synthesis, matrix degradation, and cell growth and differentiation may be coordinated at the molecular level by a single peptide growth factor. © 1993 Academic Press, Inc. © 1993 by Academic Press, Inc.