In mammals, a single Dicer participates in biogenesis of small RNAs in microRNA (miRNA) and RNAi pathways. In mice, endogenous RNAi is highly active in oocytes, but not in somatic cells, which we ascribe here to an oocyte-specific Dicer isoform (Dicer(O)). Dicer(O) lacks the N-terminal DExD helicase domain and has higher cleavage activity than the full-length Dicer in somatic cells (Dicer(S)). Unlike Dicer(S), Dicer(O) efficiently produces small RNAs from long double-stranded (dsRNA) substrates. Expression of the Dicer(O) isoform is driven by an intronic MT-C retrotransposon promoter, deletion of which causes loss of Dicer(O) and female sterility. Oocytes from females lacking the MT-C element show meiotic spindle defects and increased levels of endogenous small interfering RNA (endo-siRNA) targets, phenocopying the maternal Dicer null phenotype. The alternative Dicer isoform, whose phylogenetic origin demonstrates evolutionary plasticity of RNA-silencing pathways, is the main determinant of endogenous RNAi activity in the mouse female germline.