Hedgehog (Hh) signalling has been implicated in the development of osteoblasts and osteoclasts whose balanced activities are critical for proper bone formation. As many mouse mutants in the Hh pathway are embryonic lethal, questions on the exact effects of Hh signalling on osteogenesis remain. Using zebrafish, we show that there are two populations of endochondral osteoblasts with differential sensitivity to Hh signalling. One, formed outside the cartilage structure, requires low levels of Hh signalling and fails to differentiate in Indian hedgehog mutants. The other derives from chondrocytes and requires higher levels of Hh signalling to form. This latter population develops significantly earlier in mutants with increased Hh signalling, leading to premature endochondral ossification, and also fails to differentiate in Indian hedgehog mutants, resulting in severely delayed endochondral ossification. Additionally, we demonstrate that the timing of first osteoclast activity positively correlates to Hh levels in both endochondral and dermal bone.