Primordial follicles (PF) are formed when somatic cells differentiate into flattened pregranulosa cells, invaginate into the oocyte nests and encircle individual oocytes. We hypothesize that BMP2 regulates PF formation by promoting the transition of germ cells into oocytes and somatic cells into pregranulosa cells. E15 hamster ovaries were cultured for 8 days corresponding to postnatal day 8 (P8) in vivo, with or without BMP2, and the formation of PF was examined. BMP2 was expressed in the oocytes as well as ovarian somatic cells during development. BMP2 exposure for the first two days or the last two days or the entire 8 days of culture led to increase in PF formation suggesting that BMP2 affected both germ cell transition and somatic cell differentiation. Whereas an ALK2/3 inhibitor completely blocked BMP2-induced PF formation, an ALK2-specific inhibitor was partially effective, suggesting that BMP2 affected PF formation via both ALK2 and ALK3. BMP2 also reduced apoptosis in vitro. Further, more meiotic oocytes were present in BMP2 exposed ovaries. In summary, the results provide the first evidence that BMP2 regulates primordial follicle formation by promoting germ cell to oocyte transition and somatic cell to pre-granulosa cells formation and it acts via both ALK2 and ALK3.