Organogenesis requires coordinated regulation of cellular differentiation and morphogenesis. Cartilage cells in the vertebrate skeleton form polarized stacks, which drive the elongation and shaping of skeletal primordia. Here we show that an atypical cadherin, Fat3, and its partner Dachsous-2 (Dchs2), control polarized cell-cell intercalation of cartilage precursors during craniofacial development. In zebrafish embryos deficient in Fat3 or Dchs2, chondrocytes fail to stack and misregulate expression of sox9a. Similar morphogenetic defects occur in rerea/atr2a-/- mutants, and Fat3 binds REREa, consistent with a model in which Fat3, Dchs2 and REREa interact to control polarized cell-cell intercalation and simultaneously control differentiation through Sox9. Chimaeric analyses support such a model, and reveal long-range influences of all three factors, consistent with the activation of a secondary signal that regulates polarized cell-cell intercalation. This coordinates the spatial and temporal morphogenesis of chondrocytes to shape skeletal primordia and defects in these processes underlie human skeletal malformations. Similar links between cell polarity and differentiation mechanisms are also likely to control organ formation in other contexts.