In vitro derivation of oocytes from embryonic stem (ES) cells has the potential to be an important tool for studying oogenesis as well as advancing the field of therapeutic cloning by providing an alternative source of oocytes. Here, we demonstrate a novel, two-step method for inducing mouse ES cells to differentiate into oocyte-like cells using mouse ovarian granulosa cells. First, primordial germ cells (PGCs) were differentiated within the embryonic body (EB) cells around day 4 as defined by the expression of PGC-specific markers and were distinguished from undifferentiated ES cells. Second, day 4 EB cells were co-cultured with ovarian granulosa cells. After 10 days, these cells formed germ cell colonies as indicated by the expression of the two germ cell markers Mvh and SCP3. These cells also expressed the oocyte-specific genes Figalpha, GDF-9, and ZP1-3 but not any testis-specific genes by RT-PCR analysis. EB cultured alone or cultured in granulosa cell-conditioned medium did not express any of these oocyte-specific markers. In addition, EB co-cultured with Chinese hamster ovary (CHO) cells or cultured in CHO cell-conditioned medium did not express all of these oocyte-specific markers. Immunocytochemistry analysis using Mvh and GDF-9 antibodies confirmed that some Mvh and GDF-9 double-positive oocyte-like cells were generated within the germ cell colonies. Our results demonstrate that granulosa cells were effective in inducing the differentiation of ES cell-derived PGCs into oocyte-like cells through direct cell-to-cell contacts. Our method offers a novel in vitro system for studying oogenesis; in particular, for studying the interactions between PGCs and granulosa cells.