Most organs and tissues in the body, including bone, can repair after an injury due to the activation of endogenous adult stem/progenitor cells to replace the damaged tissue. Inherent dysfunctions of the endogenous stem/progenitor cells in skeletal repair disorders are still poorly understood. Here, we report that Fgfr3Y637C/+ over-activating mutation in Prx1-derived skeletal stem/progenitor cells leads to failure of fracture consolidation. We show that periosteal cells (PCs) carrying the Fgfr3Y637C/+ mutation can engage in osteogenic and chondrogenic lineages, but following transplantation do not undergo terminal chondrocyte hypertrophy and transformation into bone causing pseudarthrosis. Instead, Prx1Cre;Fgfr3Y637C/+ PCs give rise to fibrocartilage and fibrosis. Conversely, wild-type PCs transplanted at the fracture site of Prx1Cre;Fgfr3Y637C/+ mice allow hypertrophic cartilage transition to bone and permit fracture consolidation. The results thus highlight cartilage-to-bone transformation as a necessary step for bone repair and FGFR3 signaling within PCs as a key regulator of this transformation.