We have identified a new X-linked gene, sdc-2, that controls the hermaphrodite (XX) modes of both sex determination and X chromosome dosage compensation in Caenorhabditis elegans. Mutations in sdc-2 cause phenotypes that appear to result from a shift of both the sex determination and dosage compensation processes in XX animals to the XO modes of expression. Twenty-eight independent sdc-2 mutations have no apparent effect in XO animals, but cause two distinct phenotypes in XX animals: masculinization, reflecting a defect in sex determination, and lethality or dumpiness, reflecting a disruption in dosage compensation. The dosage compensation defect can be demonstrated directly by showing that sdc-2 mutations cause elevated levels of several X-linked transcripts in XX but not XO animals. While the masculinization is blocked by mutations in sex determining genes required for male development (her-1 and fem-3), the lethality, dumpiness and overexpression of X-linked genes are not, indicating that the effect of sdc-2 mutations on sex determination and dosage compensation are ultimately implemented by two independent pathways. We propose a model in which sdc-2 is involved in the coordinate control of both sex determination and dosage compensation in XX animals and acts in the regulatory hierarchy at a step prior to the divergence of the two pathways.