Discoidin Domain Receptor 2 (DDR2) is a collagen-activated receptor kinase that, together with integrins, is required for cells to respond to the extracellular matrix. Ddr2 loss-of-function mutations in humans and mice cause severe defects in skeletal growth and development. However, the cellular functions of Ddr2 in bone are not understood. Expression and lineage analysis showed selective expression of Ddr2 at early stages of bone formation in the resting zone and proliferating chondrocytes and periosteum. Consistent with these findings, Ddr2⁺ cells could differentiate into hypertrophic chondrocytes, osteoblasts, and osteocytes and showed a high degree of colocalization with the skeletal progenitor marker, Gli1. A conditional deletion approach showed a requirement for Ddr2 in Gli1-positive skeletal progenitors and chondrocytes but not mature osteoblasts. Furthermore, Ddr2 knockout in limb bud chondroprogenitors or purified marrow-derived skeletal progenitors inhibited chondrogenic or osteogenic differentiation, respectively. This work establishes a cell-autonomous function for Ddr2 in skeletal progenitors and cartilage and emphasizes the critical role of this collagen receptor in bone development.