Müllerian inhibiting substance (MIS) is a glycoprotein belonging to the transforming growth factor superfamily. In mammals, MIS is responsible for the regression of Müllerian ducts in the male fetus. However, the role of MIS in gonadal sex differentiation of teleost fishes, which have no Müllerian ducts, has yet to be clarified. In the present study, we examined the expression pattern of mis and mis type 2 receptor (misr2) mRNAs and the function of MIS signaling in early gonadal differentiation in medaka (teleost, Oryzias latipes). In situ hybridization showed that both mis and misr2 mRNAs were expressed in the somatic cells surrounding the germ cells of both sexes during early sex differentiation. Loss-of-function of either MIS or MISRII in medaka resulted in suppression of germ cell proliferation during sex differentiation. These results were supported by cell proliferation assay using BrdU labeling analysis. Treatment of tissue fragments containing germ cells with recombinant eel MIS (r-eSRS21) significantly induced germ cell proliferation in both sexes compared to the untreated control. On the other hand, culture of tissue fragments from the MIS- or MISRII-defective embryos inhibited proliferation of germ cells in both sexes. Moreover, treatment with r-eSRS21 in the MIS-defective embryos dose-dependently increased germ cell number in both sexes, whereas in the MISRII-defective embryos it did not permit proliferation of germ cells. These results suggest that in medaka MIS indirectly stimulates germ cell proliferation through MISRII, expressed in the somatic cells immediately after they reach the gonadal primordium.