Multiple hereditary exostoses (MHE) is characterized by the development of numerous benign bony tumors (osteochondromas). Although it has been well established that MHE is caused by mutations in EXT1 and EXT2, which encode glycosyltransferase essential for heparan sulfate (HS) biosynthesis, the cellular origin and molecular mechanisms of MHE remain elusive. Here, we show that in Ext1 mutant mice, osteochondromas develop from mesenchymal stem cell–like progenitor cells residing in the perichondrium, and we show that enhanced BMP signaling in these cells is the primary signaling defect that leads to osteochondromagenesis. We demonstrate that progenitor cells in the perichondrium, including those in the groove of Ranvier, highly express HS and that Ext1 ablation targeted to the perichondrium results in the development of osteochondromas. Ext1-deficient perichondrial progenitor cells show enhanced BMP signaling and increased chondrogenic differentiation both in vitro and in vivo. Consistent with the functional role for enhanced BMP signaling in osteochondromagenesis, administration of the small molecule BMP inhibitor LDN-193189 suppresses osteochondroma formation in two MHE mouse models. Together, our results demonstrate a role for enhanced perichondrial BMP signaling in osteochondromagenesis in mice, and they suggest the possibility of pharmacological treatment of MHE with BMP inhibitors.