Evolutionally conserved Nanos RNA-binding proteins play crucial roles in germ cell development. While a mammalian Nanos family protein, NANOS2, is required for sexual differentiation of male (XY) germ cells in mice, the underlying mechanisms and the identities of its target RNAs in vivo remain elusive. Using comprehensive microarray analysis and a bacterial artificial chromosome transgenic system, here we identify Dazl, a germ cell-specific gene encoding an RNA-binding protein implicated in translation, as a crucial target of NANOS2. Importantly, removal of the Dazl 3'-untranslated region in XY germ cells stabilizes the Dazl mRNA, resulting in elevated meiotic gene expression, abnormal resumption of the cell cycle and impaired processing-body formation, reminiscent of Nanos2-knockout phenotypes. Furthermore, our data suggest that NANOS2 acts as an antagonist of the DAZL protein. We propose a dual system of NANOS2-mediated suppression of Dazl expression as a pivotal molecular mechanism promoting sexual differentiation of XY germ cells.