Differentiation of the foetal gonad into an ovary or testis initiates sexual development of the individual and provides the foundation for ongoing reproductive health. Formation of a testis or ovary from the bipotential gonad is initiated by the specification of Sertoli and granulosa cells, respectively. These supporting cells interact with germ cells to direct germline development and ensure regulated gametogenesis and fertility in the adult. For many years, granulosa cells and Sertoli cells have been considered to derive from a common precursor cell in the foetal gonad. However, recent data suggest that granulosa cells may be derived from distinct precursor populations, with one providing the medullary follicles in the early ovary, and the other providing the cortical follicles, which support lifelong fertility. This study demonstrates that both medullary and cortical granulosa cells are derived from a common precursor. The initiation of ovary development is characterised by entry of a population of granulosa cells into mitotic arrest and contribution of these cells to medullary follicles. In addition, a population of pre-granulosa cells are maintained in a proliferative state and contribute to cortical follicles. We provide evidence that although derived from common precursor cells, these distinct pre-granulosa cell populations are regulated through differing activities of FOXL2 and β-catenin. This study provides novel insights into the cellular and molecular origin of granulosa cells and suggests that β-catenin regulates a proliferative pre-granulosa progenitor cell pool, while FOXL2 regulates terminal differentiation of granulosa cells as they assemble into follicles.