Testosterone synthesis depends on normal Leydig cell (LC) development, but the mechanisms controlling this development remain unclear. We recently demonstrated that androgen receptor (AR) ablation from a proportion of testicular peritubular myoid cells (PTM-ARKO) did not affect LC number, but resulted in compensated LC failure. The current study extends these investigations, demonstrating that PTM AR signalling is important for normal development, ultrastructure and function of adult LCs. Notably, mRNAs for LC markers [e.g. steroidogenic factor 1 (Nr5a1), insulin-like growth factor (Igf-1) and insulin-like factor 3 (Insl3)] were significantly reduced in adult PTM-ARKOs, but not all LCs were similarly affected. Two LC sub-populations were identified, one apparently ‘normal’ sub-population that expressed adult LC markers and steroidogenic enzymes as in controls, and another ‘abnormal’ sub-population that had arrested development and only weakly expressed INSL3, luteinizing hormone receptor, and several steroidogenic enzymes. Furthermore, unlike ‘normal’ LCs in PTM-ARKOs, the ‘abnormal’ LCs did not involute as expected in response to exogenous testosterone. Differential function of these LC sub-populations is likely to mean that the ‘normal’ LCs work harder to compensate for the ‘abnormal’ LCs to maintain normal serum testosterone. These findings reveal new paracrine mechanisms underlying adult LC development, which can be further investigated using PTM-ARKOs.