All undifferentiated gonads of anemonefish first differentiate into ovaries, and then testicular tissue appear among ovarian tissue, and finally form ambisexual gonads with both ovarian and testicular tissues. The role of estradiol-17beta (E2) in differentiation of ovarian cells is well conserved across phyla; however, its role in development of ambisexual gonads is poorly understood. Here we demonstrate that the E2 produced during the differentiation of ovarian cells does not allow testicular cells to differentiate in the prospective ambisexual gonad. We examined the immunolocalization of the steroidogenic enzyme cytochrome aromatase (P450arom), which is involved in E2 production. In the gonads, numbers of the P450arom-positive cells increased during ovarian differentiation. However, immunopositive cells with weak signal intensity were seen in the interstitial areas among oocytes and between oocytes and testicular tissue undergoing testicular differentiation. In contrast, P450arom-positive cells were not found in any testicular tissues of the ambisexual gonads. We also examined changes in E2 production in vitro in the gonads during testicular differentiation. E2 was high in the ovaries before the appearance all of testicular tissue, and decreased accompanying the differentiation of testicular tissue. These results suggest a balance of estrogen/androgen seems to be important during sex differentiation, and then a shift from estrogen to androgen production may induce testicular differentiation in the ovary. Further, exogenous E2 treatment suppressed naturally occurring differentiation of testicular cells forming exclusively ovarian tissues in the gonad in vivo, suggesting the increase of estrogen blocks the differentiation of testicular tissue and the formation of ambisexual gonad. J. Exp. Zool. 319A: 560–568, 2013. © 2013 Wiley Periodicals, Inc.