AbstractBone morphogenetic protein‐3 (BMP) has been identified as a negative regulator in the skeleton as mice lacking BMP3 have increased bone mass. To further understand how BMP3 mediates bone formation, we created transgenic mice overexpressing BMP3 using the type I collagen promoter. BMP3 transgenic mice displayed spontaneous rib fractures that were first detected at E17.0. The fractures were due to defects in differentiation of the periosteum and late hypertrophic chondrocytes resulting in thinner cortical bone with decreased mineralization. As BMP3 modulates BMP and activin signaling through ActRIIB, we examined the ribs of ActRIIB receptor knockout mice and found they had defects in late chondrogenesis and mineralization similar to BMP3 transgenic mice. These data suggest that BMP3 exerts its effects in the skeleton by altering signaling through ActRIIB in chondrocytes and the periosteum, and this results in defects in bone collar formation and late hypertrophic chondrocyte maturation leading to decreased mineralization and less bone. Developmental Dynamics 238:2374–2381, 2009. © 2009 Wiley‐Liss, Inc.