In developing mouse ovaries, oocytes develop as clusters of cells called nests or germ cell cysts. Shortly after birth, oocyte nests dissociate and granulosa cells surround individual oocytes forming primordial follicles. At the same time, two thirds of the oocytes die by apoptosis but the link between oocyte nest breakdown and oocyte death is unclear. Although mechanisms controlling breakdown of nests into individual oocytes and selection of oocytes for survival are currently unknown, steroid hormones may play a role. Treatment of neonatal mice with natural or synthetic estrogens results in abnormal multiple oocyte follicles in adult ovaries. Neonatal genistein treatment inhibits nest breakdown suggesting multiple oocyte follicles are nests that did not break down. Here we investigated the role of estrogen signaling in nest breakdown and oocyte survival. We characterized an ovary organ culture system which recapitulates nest breakdown, reduction in oocyte number, primordial follicle assembly and follicle growth in vitro. We found that estradiol, progesterone and genistein inhibit nest breakdown and primordial follicle assembly but have no effect on oocyte number both in organ culture and in vivo. Fetal ovaries removed from their normal environment of high levels of pregnancy hormones, underwent premature nest breakdown and oocyte loss that was rescued by addition of estradiol or progesterone. Our results implicate hormone signaling in ovarian differentiation with decreased estrogen and progesterone at birth as the primary signal to initiate oocyte nest breakdown and follicle assembly. These findings also provide insight into the mechanism of multiple oocyte follicle formation.