Drosophila ovarian germ cells require Sex-lethal (Sxl) to exit from the stem cell state and to enter the differentiation pathway. Sxl encodes a female-specific RNA binding protein and in somatic cells serves as the developmental switch gene for somatic sex determination and X-chromosome dosage compensation. None of the known Sxl target genes are required for germline differentiation, leaving open the question of how Sxl promotes the transition from stem cell to committed daughter cell. We address the mechanism by which Sxl regulates this transition through the identification of nanos as one of its target genes. Previous studies have shown that Nanos protein is necessary for GSC self-renewal and is rapidly down-regulated in the daughter cells fated to differentiate in the adult ovary. We find that this dynamic expression pattern is limited to female germ cells and is under Sxl control. In the absence of Sxl, or in male germ cells, Nanos protein is continuously expressed. Furthermore, this female-specific expression pattern is dependent on the presence of canonical Sxl binding sites located in the nanos 3' untranslated region. These results, combined with the observation that nanos RNA associates with the Sxl protein in ovarian extracts and loss and gain of function studies, suggest that Sxl enables the switch from germline stem cell to committed daughter cell by posttranscriptional down-regulation of nanos expression. These findings connect sexual identity to the stem cell self-renewal/differentiation decision and highlight the importance of posttranscriptional gene regulatory networks in controlling stem cell behavior.