Development of the testis begins with the expression of the SRY gene in pre-Sertoli cells. Soon after, testis cords containing Sertoli and germ cells are formed and fetal Leydig cells subsequently develop in the interstitial space. Studies using knockout mice have indicated that multiple genes encoding growth factors and transcription factors are implicated in fetal Leydig cell differentiation. Previously, we demonstrated that the Arx gene is implicated in this process. However, how ARX regulates Leydig cell differentiation remained unknown. In this study, we examined Arx KO testes and revealed that fetal Leydig cell numbers largely decrease throughout the fetal life. Since our study shows that fetal Leydig cells rarely proliferate, this decrease in the KO testes is thought to be due to defects of fetal Leydig progenitor cells. In sexually indifferent fetal gonads of wild type, ARX was expressed in the coelomic epithelial cells and cells underneath the epithelium as well as cells at the gonad-mesonephros border, both of which have been described to contain progenitors of fetal Leydig cells. After testis differentiation, ARX was expressed in a large population of the interstitial cells but not in fetal Leydig cells, raising the possibility that ARX-positive cells contain fetal Leydig progenitor cells. When examining marker gene expression, we observed cells as if they were differentiating into fetal Leydig cells from the progenitor cells. Based on these results, we propose that ARX acts as a positive factor for differentiation of fetal Leydig cells through functioning at the progenitor stage.