In most eutherian mammals, sexually dimorphic masculinization is established by androgen-producing fetal Leydig cells in the embryonic testis. Fetal Leydig cells, which lack expression of the testis-determining gene SRY, arise after the appearance of SRY-expressing Sertoli cells. Therefore, the appearance and differentiation of fetal Leydig cells are probably regulated by factors derived from Sertoli cells. Results from mouse genetic models have revealed that maintenance and differentiation of fetal Leydig cell population depends upon a balance between differentiation-promoting and differentiation-suppressing mechanisms. Although paracrine signaling via Sertoli cell-derived Hedgehog ligands is necessary and sufficient for fetal Leydig cell formation, cell-cell interaction via Notch signaling and intracellular transcription factors such as POD1 are implicated as suppressors of fetal Leydig cell differentiation. This review provides a model that summarizes the recent findings in fetal Leydig cell development.