Increasing extracellular osmolarity 100 mOsm/kg above plasma level to the physiological levels for cartilage induces chondrogenic marker expression and the differentiation of chondroprogenitor cells. The calcineurin inhibitor FK506 has been reported to modulate the hypertrophic differentiation of primary chondrocytes under such conditions, but the molecular mechanism has remained unclear. We aimed at clarifying its role. Chondrocyte cell lines and primary cells were cultured under plasma osmolarity and chondrocyte-specific in situ osmolarity (+100 mOsm, physosmolarity) was increased to compare the activation of nuclear factor of activated T-cells 5 (NFAT5). The effects of osmolarity and FK506 on calcineurin activity, cell proliferation, extracellular matrix quality, and BMP- and TGF-ß signaling were analyzed using biochemical, gene, and protein expression, as well as reporter and bio-assays. NFAT5 translocation was similar in chondrocyte cell lines and primary cells. High supraphysiological osmolarity compromised cell proliferation, while physosmolarity or FK506 did not, but in combination increased proteoglycan and collagen expression in chondrocytes in vitro and in situ. The expression of the TGF-ß-inducible protein TGFBI, as well as chondrogenic (SOX9, Col2) and terminal differentiation markers (e.g., Col10) were affected by osmolarity. Particularly, the expression of minor collagens (e.g., Col9, Col11) was affected. The inhibition of the FK506-binding protein suggests modulation at the TGF-ß receptor level, rather than calcineurin-mediated signaling, as a cause. Physiological osmolarity promotes terminal chondrogenic differentiation of progenitor cells through the sensitization of the TGF-ß superfamily signaling at the type I receptor. While hyperosmolarity alone facilitates TGF-ß superfamily signaling, FK506 further enhances signaling by releasing the FKBP12 break from the type I receptor to improve collagenous marker expression. Our results help explain earlier findings and potentially benefit future cell-based cartilage repair strategies.