Circulating estradiol is assumed not to contribute to sexual differentiation of the brain or other estrogen target tissues. The only estradiol available for binding to estrogen receptors is thought to be produced within brain cells by the aromatization of testosterone to estradiol as part of the action of androgen in the brain. However, we report that the concentration of free, biologically active serum estradiol (the concentration not bound to plasma proteins) was 0.54-2.17 pg/ml during the fetal and early neonatal period of sexual differentiation. These values were within the same concentration range for free estradiol observed in adult female rats throughout the estrous cycle (diestrus = 0.53 pg/ml; proestrus = 2.26 pg/ml), and estradiol clearly has physiological effects during diestrus as well as proestrus in adult females. When a stable, physiological blood concentration of [3H]estradiol of 49 pg/ml total (0.61 pg/ml free) was achieved with Silastic capsules in 2-day-old female pups, [3H]estradiol was recovered specifically bound to brain cell nuclei at approximately 2.7 fmol per pup brain or 12.4 fmol/mg DNA. The finding of brain uptake of circulating estradiol is contrary to current hypotheses. These findings suggest that estradiol in the fetal and neonatal circulation may be able to interact with testosterone and its metabolites to regulate sexual differentiation of the brain and other estrogen target tissues.