Bone development starts with condensations of undifferentiated mesenchymal cells that set a framework for future bones within the primordium. In the endochondral pathway, mesenchymal cells inside the condensation differentiate into chondrocytes and perichondrial cells in a SOX9-dependent mechanism. However, the identity of mesenchymal cells outside the condensation and how they participate in developing bones remain undefined. Here we show that mesenchymal cells surrounding the condensation contribute to both cartilage and perichondrium, robustly generating chondrocytes, osteoblasts, and marrow stromal cells in developing bones. Single-cell RNA-seq analysis ofPrrx1-cre-marked limb bud mesenchymal cells at E11.5 reveals that Notch effectorHes1is expressed in a mutually exclusive manner withSox9that is expressed in pre-cartilaginous condensations. Analysis of a Notch signaling reporterCBF1:H2B-Venusreveals that peri-condensation mesenchymal cells are active for Notch signaling.In vivolineage-tracing analysis usingHes1-creERidentifies that Hes1+early mesenchymal cells surrounding the SOX9+condensation at E10.5 contribute to both cartilage and perichondrium at E13.5, subsequently becoming growth plate chondrocytes, osteoblasts of trabecular and cortical bones, and marrow stromal cells in postnatal bones. In contrast, Hes1+cells in the perichondrium at E12.5 or E14.5 do not generate chondrocytes within cartilage, contributing to osteoblasts and marrow stromal cells only through the perichondrial route. Therefore, Hes1+peri-condensation mesenchymal cells give rise to cells of the skeletal lineage through cartilage-dependent and independent pathways, supporting the theory that early mesenchymal cells outside the condensation also play important roles in early bone development.