The Y-linked mammalian male sex-determining gene Sry encodes a DNA-binding transcription factor. Once expressed in the gonadal primordium, SRY binds to its target enhancer TESCO of Sox9 and activates its expression, which in turn leads to Sertoli cell differentiation and testis development. How SRY activates Sox9 expression remains poorly understood, as SRY lacks a recognizable transactivation domain. Using combined in vivo and in vitro approaches, we demonstrate that mouse SRY has evolved a novel bifunctional module essential for both SRY protein stabilisation and transactivation of Sox9. We further analysed the structure and function of SRY in Mus minutoides, a mouse species where XY individuals bearing a variant X chromosome develop naturally as females. We found that the sequence encoding the bifunctional module is severely degraded, which results in an almost completely abolished ability of SRY to activate Sox9-TESCO from closely related laboratory mice. Based on these data, we suggest that evolution of the SRY bifunctional module has played an important role in mouse speciation and the evolution of unusual sex determination systems.