Sex chromosomes harbour a primary sex-determining signal that triggers sexual development of the organism. However, diverse sex chromosome systems have been evolved in vertebrates. Here we use positional cloning to identify the sex-determining locus of a medaka-related fish, Oryzias dancena, and find that the locus on the Y chromosome contains a cis-regulatory element that upregulates neighbouring Sox3 expression in developing gonad. Sex-reversed phenotypes in Sox3(Y) transgenic fish, and Sox3(Y) loss-of-function mutants all point to its critical role in sex determination. Furthermore, we demonstrate that Sox3 initiates testicular differentiation by upregulating expression of downstream Gsdf, which is highly conserved in fish sex differentiation pathways. Our results not only provide strong evidence for the independent recruitment of Sox3 to male determination in distantly related vertebrates, but also provide direct evidence that a novel sex determination pathway has evolved through co-option of a transcriptional regulator potentially interacted with a conserved downstream component.