Organogenesis of the ovary is a highly orchestrated process involving multiple lineage determination of ovarian surface epithelium, granulosa cells and theca cells. Although the sources of ovarian surface epithelium and granulosa cells are known, the origin(s) of theca progenitor cells have not been definitively identified. Here we show that theca cells derive from two sources: Wt1⁺ cells indigenous to the ovary and Gli1⁺ mesenchymal cells that migrate from the mesonephros. These progenitors acquire theca lineage marker Gli1 in response to paracrine signals Desert hedgehog (Dhh) and Indian hedgehog (Ihh) from granulosa cells. Ovaries lacking Dhh/Ihh exhibit theca layer loss, blunted steroid production, arrested folliculogenesis and failure to form corpora lutea. Production of Dhh/Ihh in granulosa cells requires growth differentiation factor 9 (GDF9) from the oocyte. Our studies provide the first genetic evidence for the origins of theca cells and reveal a multicellular interaction critical for the formation of a functional theca.