Recent evidence suggests that low oxygen tension (hypoxia) may control fetal development and differentiation. A crucial mediator of the adaptive response of cells to hypoxia is the transcription factor Hif-1alpha. In this study, we provide evidence that mesenchymal condensations that give origin to endochondral bones are hypoxic during fetal development, and we demonstrate that Hif-1alpha is expressed and transcriptionally active in limb bud mesenchyme and in mesenchymal condensations. To investigate the role of Hif-1alpha in mesenchymal condensations and in early chondrogenesis, we conditionally inactivated Hif-1alpha in limb bud mesenchyme using a Prx1 promoter-driven Cre transgenic mouse. Conditional knockout of Hif-1alpha in limb bud mesenchyme does not impair mesenchyme condensation, but alters the formation of the cartilaginous primordia. Late hypertrophic differentiation is also affected as a result of the delay in early chondrogenesis. In addition, mutant mice show a striking impairment of joint development. Our study demonstrates a crucial, and previously unrecognized, role of Hif-1alpha in early chondrogenesis and joint formation.