Supporting cells (Sertoli and granulosa) and steroidogenic cells (Leydig and theca-interstitium) are two major somatic cell types in mammalian gonads, but the mechanisms that control their differentiation during gonad development remain elusive. In this study, we found that deletion of Wt1 in the ovary after sex determination caused ectopic development of steroidogenic cells at the embryonic stage. Furthermore, differentiation of both Sertoli and granulosa cells was blocked when Wt1 was deleted before sex determination and most genital ridge somatic cells differentiated into steroidogenic cells in both male and female gonads. Further studies revealed that WT1 repressed Sf1 expression by directly binding to the Sf1 promoter region, and the repressive function was completely abolished when WT1 binding sites were mutated. This study demonstrates that Wt1 is required for the lineage specification of both Sertoli and granulosa cells by repressing Sf1 expression. Without Wt1, the expression of Sf1 was upregulated and the somatic cells differentiated into steroidogenic cells instead of supporting cells. Our study uncovers a novel mechanism of somatic cell differentiation during gonad development.