We have generated the first mouse model of fibroblast growth factor receptor 3 (Fgfr3) with the K644E mutation, which accurately reflects the embryonic onset of a neonatal lethal dwarfism, thanatophoric dysplasia type II (TDII). Long-bone abnormalities were identified as early as embryonic day 14, during initiation of endochondral ossification. Increased expression of Patched (Ptc) was observed, independent of unaltered expression of parathyroid hormone-related peptide (PTHrP) receptor and Indian Hedgehog (Ihh), suggesting a new regulatory role for Fgfr3 in embryos. We demonstrate that the mutation enhances chondrocyte proliferation during the early embryonic skeletal development, in contrast to previous reports that showed decreased proliferation in postnatal-onset dwarf mice with activating Fgfr3 mutations. This suggests that signaling through Fgfr3 both promotes and inhibits chondrocyte proliferation, depending on the time during development. In contrast, suppressed chondrocyte differentiation was observed throughout the embryonic stages, defining decreased differentiation as the primary cause of retarded longitudinal bone growth in TDII. This model was successfully crossed with a cartilage-specific Cre transgenic strain, excluding the lung as the primary cause of lethality.