Transforming growth factor-${eta}$ (TGF-${eta}$) plays crucial roles in controlling cell differentiation and maintaining tissue integrity. Previously we reported that TGF-${eta}$3 treatment decreased the mRNA expression of the gap junction protein, connexin 43 as well as cell number, which lead to the inhibition of chondrogenic condensation in cultured chick leg bud mesenchymal cells. The present study demonstrates that TGF-${eta}$3 can induce cleavage in the ectodomain of neuronal cadherin (N-cadherin) at the initiation stage of chondrogenesis and reduce cell numbers, cellular adhesion and the expression level of connexin 43. Differential displayed PCR (DD-PCR) comparison of adherent- and non-adherent chick leg chondrogenic progenitor cells showed increased expression of the chick ras-responsive element binding transcription factor, cRREB-1, in adherent cells. In chick leg bud mesenchymal cells, cRREB-1 transcription was inhibited by TGF-${eta}$3 at the early stage of chondrogenesis. Small interfering RNA (siRNA)-mediated knockdown of cRREB-1 reduced cell numbers, cellular adhesion, and the expression level of connexin 43 resulting in the inhibition of precartilage condensation. Taken together, these findings indicate that TGF-${eta}$3 mediates the inhibitory signal necessary for precartilage condensation by stimulating N-cadherin shedding and reducing cRREB-1 expression levels.