The differential exposure of males and females to testosterone (T) and its metabolite estradiol (E) contributes to the development of sex differences in the brain. However, the mechanisms by which T and E permanently alter neural development remain virtually unknown. Two regions of the rat preoptic area, the anteroventral periventricular nucleus (AVPv) and the medial preoptic nucleus (MPN), are sexually dimorphic and serve as models for studying the hormonal mechanisms of sexual differentiation. Around birth, these regions express dramatically higher levels of progesterone receptor immunoreactivity (PRir) in males than they do in females. The present study examined the possibility that sexually dimorphic induction of PR expression in these two regions constitutes a potential mechanism of E-mediated sexual differentiation. Prenatal exposure to either T propionate or the synthetic estrogen, diethylstilbestrol, but not dihydrotestosterone propionate, significantly increased PRir levels in the MPN and AVPv of fetal females compared with controls. Prenatal exposure to the aromatase inhibitor, 1,4,6-androstatriene-3,17-dione, significantly reduced PRir in the MPN and AVPv of fetal males, whereas the androgen receptor antagonist flutamide had no effect. This suggests that aromatization of T into E is crucial for the sex difference in PR expression in the MPN and AVPv during development.