Nell‐1 is a growth factor required for normal skeletal development and expression of extracellular matrix proteins required for bone and cartilage cell differentiation. We identified the transcription factor nuclear factor of activated T cells (Nfatc2) as a primary response gene of Nell‐1 through a microarray screen, with validation using real‐time polymerase chain reaction (PCR). We investigated the effects of recombinant Nell‐1 protein on the chondrogenic cell line ATDC5 and primary mouse chondrocytes. The osteochondral transcription factor Runx2 was investigated as a possible intermediary between Nell‐1 and Nfatc2 using adenoviral overexpression of wild‐type and dominant‐negative Runx2. Nell‐1 transiently induced both transcription and translation of Nfatc2, an effect inhibited by transduction of dominant‐negative Runx2, suggesting that Runx2 was necessary for Nfatc2 induction. Differentiation assays revealed inhibitory effects of Nell‐1 on ATDC5 cells. Although proliferation was unaffected, expression of chondrocyte‐specific genes was decreased, and cartilage nodule formation and proteoglycan accumulation were suppressed. siRNA knockdown of Nfatc2 significantly reversed these inhibitory effects. To elucidate the relationship between Nell‐1, Runx2, and Nfatc2 in vivo, their presence and distribution were visualized in femurs of wild‐type and Nell1‐deficient mice at both neonatal and various developmental stages using immunohistochemistry. All three proteins colocalized in the perichondrium of wild‐type femurs but stained weakly or were completely absent in Nell1‐deficient femurs at neonatal stages. Thus Nfatc2 likely plays an important role in Nell‐1‐mediated osteochondral differentiation in vitro and in vivo. To our knowledge, this is the first demonstration that Nfatc2 is a primary response gene of Nell‐1. © 2011 American Society for Bone and Mineral Research.