During testis development, fetal Leydig cells increase their population from a pool of progenitor cells rather than from proliferation of a differentiated cell population. However, the mechanism that regulates Leydig stem cell self-renewal and differentiation is unknown. Here, we show that blocking Notch signaling, by inhibiting gamma-secretase activity or deleting the downstream target gene Hairy/Enhancer-of-split 1, results in an increase in Leydig cells in the testis. By contrast, constitutively active Notch signaling in gonadal somatic progenitor cells causes a dramatic Leydig cell loss, associated with an increase in undifferentiated mesenchymal cells. These results indicate that active Notch signaling restricts fetal Leydig cell differentiation by promoting a progenitor cell fate. Germ cell loss and abnormal testis cord formation were observed in both gain- and loss-of-function gonads, suggesting that regulation of the Leydig/interstitial cell population is important for male germ cell survival and testis cord formation.