Biliary cysts in adult patients affected by polycystic liver disease are lined by cholangiocytes that proliferate, suggesting that initiation of cyst formation depends on proliferation. Here, we challenge this view by analyzing cyst-lining cell proliferation and differentiation in Cpk mouse embryos and in livers from human fetuses affected by Autosomal Recessive Polycystic Kidney Disease (ARPKD), at early stages of cyst formation. Proliferation of fetal cholangiocyte precursors, measured by immunostaining in human and mouse livers, was low and did not differ between normal and ARPKD or Cpk livers, excluding excessive proliferation as an initiating cause of liver cysts. Instead, our analyses provide evidence that the polycystic livers exhibit increased and accelerated differentiation of hepatoblasts into cholangiocyte precursors, eventually coalescing into large biliary cysts. Lineage tracing experiments, performed in mouse embryos, indicated that the cholangiocyte precursors in Cpk mice generate cholangiocytes and periportal hepatocytes, like in wild-type animals. Therefore, contrary to current belief, cyst formation in polycystic liver disease does not necessarily depend on overproliferation. Combining our prenatal data with available data from adult livers, we propose that polycystic liver can be initiated by proliferation-independent mechanisms at a fetal stage, followed by postnatal proliferation-dependent cyst expansion.