The Drosophila ovary is an excellent system with which to study germline stem cell (GSC) biology. Two or three female GSCs are maintained in a structure called a niche at the anterior tip of the ovary. The somatic niche cells surrounding the GSCs include terminal filament cells, cap cells and escort stem cells. Mounting evidence has demonstrated that BMP-like morphogens are the immediate upstream signals to promote GSC fate by preventing the expression of Bam, a key differentiation factor. In contrast to their morphogenic long-range action in imaginal epithelia, BMP molecules in the ovarian niche specify GSC fate at single-cell resolution. How this steep gradient of BMP response is achieved remains elusive. In this study, we found that the glypican Dally is essential for maintaining GSC identity. Dally is highly expressed in cap cells. Cell-specific Dally-RNAi, mutant clonal analysis and cell-specific rescue of the GSC-loss phenotype suggest that Dally acts in the cap cells adjacent to the GSCs. We confirmed that Dally facilitated BMP signaling in GSCs by examining its downstream targets in various dally mutants. Conversely, when we overexpressed Dally in somatic cells outside the niche, we increased the number of GSC-like cells apparently by expanding the pro-GSC microenvironment. Furthermore, in a genetic setting we revealed a BMP-sensitivity distinction between germline and somatic cells, namely that Dally is required for short-range BMP signaling in germline but not in somatic cells. We propose that Dally ensures high-level BMP signaling in the ovarian niche and thus female GSC determination.