Collagenases are involved in cartilage matrix resorption. Using bovine fetal chondrocytes isolated from physeal cartilages and separated into a distinct prehypertrophic subpopulation, we show that in serum‐free culture they elaborate an extracellular matrix and differentiate into hypertrophic chondrocytes. This is characterized by expression of type X collagen and the transcription factor Cbfa1 and increased incorporation of⁴⁵Ca²⁺ in the extracellular matrix, which is associated with matrix calcification. Collagenase activity, attributable only to matrix metalloproteinase (MMP) 13 (collagenase‐3), is up‐regulated on differentiation. A nontoxic carboxylate inhibitor of MMP‐13 prevents this differentiation; it suppresses expression of type X collagen, Cbfa1, and MMP‐13 and inhibits increased calcium incorporation in addition to inhibiting degradation of type II collagen in the extracellular matrix. General synthesis of matrix proteins is unaffected. These results suggest that proteolysis involving MMP‐13 is required for chondrocyte differentiation that occurs as part of growth plate development and which is associated with matrix mineralization.