Indian hedgehog (Ihh) is essential for chondrocyte differentiation and endochondral ossification and acts with parathyroid hormone-related peptide in a negative feedback loop to regulate early chondrocyte differentiation and entry to hypertrophic differentiation. Independent of this function, we and others recently reported independent Ihh functions to promote chondrocyte hypertrophy and matrix mineralization in vivo and in vitro. However, the molecular mechanisms for these actions and their functional significance are still unknown. We recently discovered that Ihh overexpression in chondrocytes stimulated the expression of late chondrocyte differentiation markers and induced matrix mineralization. Focusing on collagen type X (Col10α1) expression and transcription, we observed that hedgehog downstream transcription factors GLI-Krüppel family members (Gli) 1/2 increased COL10A1 promoter activity and identified a novel Gli1/2 response element in the 250-bp basic promoter. In addition, we found that Ihh induced Runx2 expression in chondrocytes without up-regulating other modulators of chondrocyte maturation such as Mef2c, Foxa2, and Foxa3. Runx2 promoted Col10α1 expression in cooperation with Ihh. Further analyses using promoter assays, immunofluorescence, and binding assays showed the interaction of Gli1/2 in a complex with Runx2/Smads induces chondrocyte differentiation. Finally, we could demonstrate that Ihh promotes in vitro matrix mineralization using similar molecular mechanisms. Our data provide an in vitro mechanism for Ihh signaling to positively regulate Col10α1 transcription. Thus, Ihh signaling could be an important player for not only early chondrocyte differentiation but maturation and calcification of chondrocytes.