Increasing evidence indicates that heparan sulfate (HS) is an integral component of many morphogen signaling pathways. However, its mechanisms of action appear to be diverse, depending on the type of morphogen and the developmental contexts. To define the function of HS in skeletal development, we conditionally ablated Ext1, which encodes an essential glycosyltransferase for HS synthesis, in limb bud mesenchyme using the Prx1-Cre transgene. These conditional Ext1 mutant mice display severe limb skeletal defects, including shortened and malformed limb bones, oligodactyly, and fusion of joints. In developing limb buds of mutant mice, chondrogenic differentiation of mesenchymal condensations is delayed and impaired, whereas the area of differentiation is diffusely expanded. Correspondingly, the distribution of both bone morphogenic protein (BMP) signaling domains and BMP2 immunoreactivity in the mutant limb mesenchyme is broadened and diffuse. In micromass cultures, chondrogenic differentiation of mutant chondrocytes is delayed, and the responsiveness to exogenous BMPs is attenuated. Moreover, the segregation of the pSmad1/5/8-expressing chondrocytes and fibronectin-expressing perichondrium-like cells surrounding chondrocyte nodules is disrupted in mutant micromass cultures. Together, our results show that HS is essential for patterning of limb skeletal elements and that BMP signaling is one of the major targets for the regulatory role of HS in this developmental context.