During mammalian embryonic development, the ovaries and testes develop from somatic cells of the urogenital ridges as indifferent gonads, harbouring primordial germ cells that have migrated there. After sex determination of the gonads, the testes produce testosterone and anti-Mullerian hormone which mediate male sexual differentiation, and the female developmental pathway ensues in their absence. Here we show that transcripts of the LIM homeobox gene Lhx9 are present in urogenital ridges of mice at embryonic day 9.5; later they localize to the interstitial region as morphological differentiation occurs. In mice lacking Lhx9 function, germ cells migrate normally, but somatic cells of the genital ridge fail to proliferate and a discrete gonad fails to form. In the absence of testosterone and anti-Mullerian hormone, genetically male mice are phenotypically female. The expression of steroidogenic factor 1 (Sf1), a nuclear receptor essential for gonadogenesis, is reduced to minimal levels in the Lhx9-deficient genital ridge, indicating that Lhx9 may lie upstream of Sf1 in a developmental cascade. Unlike mice lacking other genes that mediate early stages of gonadogenesis, Lhx9 mutants do not exhibit additional major developmental defects. Thus, LHX9 mutations may underlie certain forms of isolated gonadal agenesis in humans.