In mammals, the primordial follicle pool represents the entire reproductive potential of a female. The transforming growth factor-β (TGF-β) family member activin (ACT) contributes to folliculogenesis, although the exact mechanism is not known. The role of FST288, the strongest ACT-neutralizing isoform of follistatin (FST), during cyst breakdown and primordial follicle formation in the fetal mice ovary was assessed using an in vitro culture system. FST was continuously expressed in the oocytes as well as the cuboidal granulosa cells of growing follicles in perinatal mouse ovaries. Treatment with FST288 delayed germ cell nest breakdown, particularly near the periphery of the ovary, and dramatically decreased the percentage of primordial follicles. In addition, there was a dramatic decrease in proliferation of granulosa cells and somatic cell expression of Notch signaling was impaired. In conclusion, FST288 impacts germ cell nest breakdown and primordial follicle assembly by inhibiting somatic cell proliferation.