The sexually dimorphic characteristics of the reproductive tract in Drosophila require that cells of the gonad and the genital disc be assigned sex-specific fates. We report here that DWnt-2, a secreted glycoprotein related to wingless, is a signal required for cell fate determination and morphogenesis in the developing male reproductive tract. Testes from DWnt-2 null mutant flies lack the male-specific pigment cells of the reproductive tract sheath and the muscle precursors of the sheath fail to migrate normally. However, other cell types of the testis are unaffected. DWnt-2 is expressed in somatic cells of the gonad throughout development, implicating it as a signal that can influence pigment cell fate directly. Indeed, the ectopic expression of DWnt-2 in females results in the appearance of male-specific pigment cells in otherwise morphologically normal ovaries. Thus, the presence of pigment cells is a sexually dimorphic trait that is controlled by DWnt-2 expression. DWnt-2 is also expressed in regions of the male genital disc and gonad, which we have identified as sites of contact with muscle precursor cells, suggesting that secreted DWnt-2 protein is a signal for the migration or attachment of these cells.