The nuclear receptor transcription factor Dax1 is hypothesized to play a role in testicular development, although the mechanism of its action is unknown. Here, we present evidence that Dax1 plays an early essential role in fetal testis development. We hypothesize that upregulation of Sox9 expression in precursor somatic cells, a process required for their differentiation as Sertoli cells, depends on the coordinated expression of Dax1, Sry and another gene, Tda1. Our conclusion and model are based on the following experimental findings: (1) presence of a mutant Dax1 allele (Dax1-) results in complete gonadal sex reversal in C57BL/6JEi (B6) XY mice, whereas testes develop in DBA/2J (D2) and (B6xD2)F1 XY mice; (2) B6-DAX1 sex reversal is inherited as a complex trait that includes the chromosome 4 gene Tda1; (3) B6 Dax1-/Y fetal gonads initiate development as ovaries, even though Sry expression is activated at the correct time and at appropriate levels; (4) upregulation of Sox9 does not occur in B6 Dax1-/Y fetal gonads in spite of apparently normal Sry expression; and (5) overexpression of Sry in B6 Dax1-/Y fetal gonads upregulates Sox9 and corrects testis development.