Activating mutations in fibroblast growth factor (FGF) receptor 3 and inactivating mutations in the NPR2 guanylyl cyclase both cause severe short stature, but how these two signaling systems interact to regulate bone growth is poorly understood. Here, we show that bone elongation is increased when NPR2 cannot be dephosphorylated and thus produces more cyclic GMP. By developing an in vivo imaging system to measure cyclic GMP production in intact tibia, we show that FGF-induced dephosphorylation of NPR2 decreases its guanylyl cyclase activity in growth plate chondrocytes in living bone. The dephosphorylation requires a PPP-family phosphatase. Thus FGF signaling lowers cyclic GMP production in the growth plate, which counteracts bone elongation. These results define a new component of the signaling network by which activating mutations in the FGF receptor inhibit bone growth.