The role of basal suppression of the sonic hedgehog (Shh) pathway and its interaction with Indian hedgehog (Ihh) signaling during limb/skeletal morphogenesis is not well understood. The orphan G protein-coupled receptor Gpr161 localizes to primary cilia and functions as a negative regulator of Shh signaling by promoting Gli transcriptional repressor versus activator formation. Here, we show that forelimb buds are not formed in Gpr161 knockout mouse embryos despite establishment of prospective limb fields. Limb-specific deletion of Gpr161 resulted in prematurely expanded Shh signaling and ectopic Shh-dependent patterning defects resulting in polysyndactyly. In addition, endochondral bone formation in forearms, including formation of both trabecular bone and bone collar was prevented. Endochondral bone formation defects resulted from accumulation of proliferating round/periarticular-like chondrocytes, lack of differentiation into columnar chondrocytes, and corresponding absence of Ihh signaling. Gpr161 deficiency in craniofacial mesenchyme also prevented intramembranous bone formation in calvarium. Defects in limb patterning, endochondral and intramembranous skeletal morphogenesis were suppressed in the absence of cilia. Overall, Gpr161 promotes forelimb formation, regulates limb patterning, prevents periarticular chondrocyte proliferation and drives osteoblastogenesis in intramembranous bones in a cilium-dependent manner.