Osteoarthritis (OA) is the most common form of joint disease in middle‐aged and older individuals. Previous studies have shown that over‐expression of matrix‐degrading proteinases and proinflammatory cytokines is associated with osteoarthritic cartilage degradation. However, it remains unclear which transcription factors regulate the expression of these cartilage‐degrading molecules in articular chondrocytes. This study demonstrated that mice lacking Nfat1, a member of the nuclear factor of activated T cells (NFAT) transcription factors, exhibited normal skeletal development but displayed loss of type II collagen (collagen‐2) and aggrecan with over‐expression of specific matrix‐degrading proteinases and proinflammatory cytokines in young adult articular cartilage of load‐bearing joints. These initial changes are followed by articular chondrocyte proliferation/clustering, progressive articular surface destruction, periarticular chondro‐osteophyte formation and exposure of thickened subchondral bone, all of which resemble human OA. Forced expression of Nfat1 delivered with lentiviral vectors in cultured 3 month‐old primary Nfat1 knockout (Nfat1^−/−) articular chondrocytes partially or completely rescued the abnormal catabolic and anabolic activities of Nfat1^−/− articular chondrocytes. These new findings revealed a previously unrecognized critical role of Nfat1 in maintaining the physiological function of differentiated adult articular chondrocytes through regulating the expression of specific matrix‐degrading proteinases and proinflammatory cytokines. Nfat1 deficiency causes OA due to an imbalance between the catabolic and anabolic activities of adult articular chondrocytes, leading to articular cartilage degradation and failed repair activities in and around articular cartilage. These results may provide new insights into the aetiology, pathogenesis and potential therapeutic strategies for osteoarthritis. Copyright © 2009 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.