Follistatin (FST) is involved in hair follicle morphogenesis. However, its effects on hair traits are not clear. This study was designed to investigate the effects of FST gene single nucleotide polymorphisms (SNP) on wool quality traits in Chinese Merino sheep (Junken Type). We performed gene expression analysis, SNP detection, and association analysis of FST gene with sheep wool quality traits. The real-time RT-PCR analysis showed that FST gene was differentially expressed in adult skin between Chinese Merino sheep (Junken Type) and Suffolk sheep. Immunostaining showed that FST was localized in inner root sheath (IRS) and matrix of hair follicle (HF) in both SF and Suffolk sheep. Sequencing analysis identified a total of seven SNPs (termed SNPs 1–7) in the FST gene in Chinese Merino sheep (Junken Type). Association analysis showed that SNP2 (Chr 16. 25,633,662 G>A) was significantly associated with average wool fiber diameter, wool fineness SD, and wool crimp (P < 0.05). SNP4 (Chr 16. 25,633,569 C>T) was significantly associated with wool fineness SD and CV of fiber diameter (P < 0.05). Similarly, the haplotypes derived from these seven identified SNPs were also significantly associated with average wool fiber diameter, wool fineness SD, CV of fiber diameter, and wool crimp (P < 0.05). Our results suggest that FST influences wool quality traits and its SNPs 2 and 4 might be useful markers for marker-assisted selection and sheep breeding.