In order to investigate the function of gonadal somatic cells in the sex differentiation of germ cells, we produced chimera fish containing both male (XY) and female (XX) cells by means of cell transplantation between blastula embryos in the medaka, Oryzias latipes. Sexually mature chimera fish were obtained from all combinations of recipient and donor genotypes. Most chimeras developed according to the genetic sex of the recipients, whose cells are thought to be dominant in the gonads of chimeras. However, among XX/XY (recipient/donor) chimeras, we obtained three males that differentiated into the donor's sex. Genotyping of their progeny and of strain-specific DNA fragments in their testes showed that, although two of them produced progeny from only XX spermatogenic cells, their testes all contained XY cells. That is, in the two XX/XY chimeras, germ cells consisted of XX cells but testicular somatic cells contained both XX and XY cells, suggesting that the XY somatic cells induced sex reversal of the XX germ cells and the XX somatic cells. The histological examination of developing gonads of XX/XY chimera fry showed that XY donor cells affect the early sex differentiation of germ cells. These results suggest that XY somatic cells start to differentiate into male cells depending on their sex chromosome composition, and that, in the environment produced by XY somatic cells in the medaka, germ cells differentiate into male cells regardless of their sex chromosome composition.