Sertoli and granulosa cells are two major types of somatic cells in male and female gonads, respectively. Previous studies have shown that Sertoli and granulosa cells are derived from common progenitor cells and that differentiation of these two cell types is regulated by sex differentiation genes. The signaling pathway including the adhesion and transcription factor (cadherin-associated protein, β1, also known as β-catenin) regulates differentiation of granulosa cells in the absence of the transcription factor Sry, and overactivation of β-catenin in the presence of Sry leads to granulosa prior to sex determination. Surprisingly, our previous study found that β-catenin overactivation in Sertoli cells after sex determination can also cause disruption of the testicular cord and aberrant testis development. However, the underlying molecular mechanism was unclear. In this study, we found that constitutive activation of in Sertoli cells led to ectopic expression of the granulosa cell-specific marker FOXL2 in testes. Co-staining experiments revealed that FOXL2-positive cells were derived from Sertoli cells, and Sertoli cells were transformed into granulosa-like cells after overactivation. Further studies demonstrated that CTNNB1 induced expression by directly binding to transcription factor Tcf/Lef-binding sites in the promoter region. We also found that direct overexpression of decreased the expression of Sertoli cell-specific genes in primary Sertoli cells. Taken together, these results demonstrate that repression of β-catenin (CTNNB1) signaling is required for lineage maintenance of Sertoli cells. Our study provides a new mechanism for Sertoli cell lineage maintenance during gonad development.