Congenital defects in genital and/or gonadal development occur in 1 in 1000 humans, but the molecular basis for these defects in most cases remains undefined. We show that the basic helix-loop-helix transcription factor Pod1 (capsulin/epicardin/Tcf21) is essential for normal development of the testes and ovaries, and hence for sexual differentiation. The gonads of Pod1 knockout (KO) mice were markedly hypoplastic, and the urogenital tracts of both XX and XY mice remained indistinguishable throughout embryogenesis. Within Pod1 KO gonads, the number of cells expressing the cholesterol side-chain cleavage enzyme (Scc) was increased markedly. Biochemical and genetic approaches demonstrated that Pod1 transcriptionally represses steroidogenic factor 1 (Sf1/Nr5a1/Ad4BP), an orphan nuclear receptor that regulates the expression of multiple genes (including Scc) that mediate sexual differentiation. Our results establish that Pod1 is essential for gonadal development, and place it in a transcriptional network that orchestrates cell fate decisions in gonadal progenitors.