Sex determination is an essential step in the commitment of a germ cell to a sperm or egg. However, the intrinsic factors that determine the sexual fate of vertebrate germ cells are unknown. Here, we show that foxl3, which is expressed in germ cells but not somatic cells in the gonad, is involved in sperm-egg fate decision in medaka fish. Adult XX medaka with disrupted foxl3 developed functional sperm in the expanded germinal epithelium of a histologically functional ovary. In chimeric medaka, mutant germ cells initiated spermatogenesis in female wild-type gonad. These results indicate that a germ cell-intrinsic cue for the sperm-egg fate decision is present in medaka and that spermatogenesis can proceed in a female gonadal environment.