Skeletal formation is dependent on timely recruitment of skeletal stem cells and their ensuing synthesis and remodeling of the major fibrillar collagens, type I collagen and type II collagen, in bone and cartilage tissues during development and postnatal growth. Loss of the major collagenolytic activity associated with the membrane-type 1 matrix metalloproteinase (MT1-MMP) results in disrupted skeletal development and growth in both cartilage and bone, where MT1-MMP is required for pericellular collagen dissolution. We show here that reconstitution of MT1-MMP activity in the type II collagen-expressing cells of the skeleton rescues not only diminished chondrocyte proliferation, but surprisingly, also results in amelioration of the severe skeletal dysplasia associated with MT1-MMP deficiency through enhanced bone formation. Consistent with this increased bone formation, type II collagen was identified in bone cells and skeletal stem/progenitor cells of wildtype mice. Moreover, bone marrow stromal cells isolated from mice expressing MT1-MMP under the control of the type II collagen promoter in an MT1-MMP-deficient background showed enhanced bone formation in vitro and in vivo compared with cells derived from nontransgenic MT1-MMP-deficient littermates. These observations show that type II collagen is not stringently confined to the chondrocyte but is expressed in skeletal stem/progenitor cells (able to regenerate bone, cartilage, myelosupportive stroma, marrow adipocytes) and in the chondrogenic and osteogenic lineage progeny where collagenolytic activity is a requisite for proper cell and tissue function.