The long bones of the vertebrate body are built by the initial formation of a cartilage template that is later replaced by mineralized bone. The proliferation and maturation of the skeletal precursor cells (chondrocytes) within the cartilage template and their replacement by bone is a highly coordinated process which, if misregulated, can lead to a number of defects including dwarfism and other skeletal deformities. This is exemplified by the fact that abnormal bone development is one of the most common types of human birth defects. Yet, many of the factors that initiate and regulate chondrocyte maturation are not known. We identified a recessive dwarf mouse mutant (pug) from an N-ethyl-N-nitrosourea (ENU) mutagenesis screen. pug mutant skeletal elements are patterned normally during development, but display a ~20% length reduction compared to wild-type embryos. We show that the pug mutation does not lead to changes in chondrocyte proliferation but instead promotes premature maturation and early ossification, which ultimately leads to disproportionate dwarfism. Using sequence capture and high-throughput sequencing, we identified a missense mutation in the Xylosyltransferase 1 (Xylt1) gene in pug mutants. Xylosyltransferases catalyze the initial step in glycosaminoglycan (GAG) chain addition to proteoglycan core proteins, and these modifications are essential for normal proteoglycan function. We show that the pug mutation disrupts Xylt1 activity and subcellular localization, leading to a reduction in GAG chains in pug mutants. The pug mutant serves as a novel model for mammalian dwarfism and identifies a key role for proteoglycan modification in the initiation of chondrocyte maturation.