Lizards are amniotes with the remarkable ability to regenerate amputated tails. The early regenerated lizard tail forms a blastema, and the regenerated skeleton consists of a cartilage tube (CT) surrounding the regenerated spinal cord. The proximal CT undergoes hypertrophy and ossifies, while the distal CT resists ossification for the lifetime of the lizard. We hypothesize that differences in cell sources and signaling account for divergent cartilage development between proximal and distal CT regions. Exogenous spinal cord implants induced ectopic CT formation in lizard (Anolis carolinensis) blastemas. Regenerated spinal cords expressed Shh, and cyclopamine inhibited CT induction. Blastemas containing vertebrae with intact spinal cords formed CTs with proximal hypertrophic regions and distal non-hypertrophic regions, while removal of spinal cords resulted in formation of proximal CT areas only. In fate mapping studies, FITC-labelled vertebra periosteal cells were detected in proximal, but not distal, CT areas. Conversely, FITC-labelled blastema cells were restricted to distal CT regions. Proximal cartilage formation was inhibited by removal of periosteum and could be recapitulated in vitro by periosteal cells treated with Ihh and BMP-2. These findings suggest that proximal CTs are directly derived from vertebra periosteal cells in response to BMP and Ihh signaling, while distal CTs form from blastema cells in response to Shh signals from regenerated spinal cords. Thus, lizard tail proximal CTs develop independently from tail blastemas, resembling cartilage calluses formed during fracture repair, while distal CTs are derived from the blastemas similar to regenerated salamander tails.