Indian Hedgehog (IHH) signaling, a key regulator of skeletal development, is highly activated in cartilage and bone tumors. Yet deletion of Ptch1, encoding an inhibitor of IHH receptor Smoothened (SMO), in chondrocyte or osteoblasts does not cause tumorigenesis. Here, we show that Ptch1 deletion in mice Prrx1⁺mesenchymal stem/stromal cells (MSCs) promotes MSC proliferation and osteogenic and chondrogenic differentiation but inhibits adipogenic differentiation. Moreover, Ptch1 deletion led to development of osteoarthritis-like phenotypes, exostoses, enchondroma, and osteosarcoma in Smo-Gli1/2-dependent manners. The cartilage and bone tumors are originated from Prrx1⁺ lineage cells and express low levels of osteoblast and chondrocyte markers, respectively. Mechanistically, Ptch1 deletion increases the expression of Wnt5a/6 and leads to enhanced β-Catenin activation. Inhibiting Wnt/β-Catenin pathway suppresses development of skeletal anomalies including enchondroma and osteosarcoma. These findings suggest that cartilage/bone tumors arise from their early progenitor cells and identify the Wnt/β-Catenin pathway as a pharmacological target for cartilage/bone neoplasms.