The influence of streptozotocin-induced diabetes on discrete stages of matrix-induced endochondral bone formation has been investigated. Mesenchymal cell proliferation was inhibited in diabetic rats as evidenced by a 65% reduction of ornithine decarboxylase (ODC) activity and a 56% reduction of [3H]thymidine incorporation per microgram DNA compared to nondiabetic controls; the inhibition was prevented by insulin treatment. In diabetic animals, chondrogenesis on day 7 was reduced by 49% compared to control animals as assessed by 35SO4 incorporation. Exogenous insulin was stimulatory to cartilage development when present during days 0 through 4 (mesenchymal cell proliferation). Calcification of cartilage and osteogenesis were reduced by more than 50% in diabetic rats and corrected by insulin as measured by alkaline phosphatase activity and 45Ca incorporation. Decreased in vivo endochondral bone growth and development during diabetes is the result of 1) inhibition of insulin-dependent mesenchymal cell proliferation, 2) decreased and delayed cartilage formation due to impaired mesenchymal cell proliferation, 3) decreased and delayed vascular invasion prior to chondrolysis and osteogenesis, and 4) reduced insulin-dependent calcification and ossification.