Interactions between the somatic gonad and the germ line influence the amplification, maintenance, and differentiation of germ cells. In Caenorhabditis elegans, the distal tip cell/germline interaction promotes a mitotic fate and/or inhibits meiosis through GLP-1/Notch signaling. However, GLP-1-mediated signaling alone is not sufficient for a wild-type level of germline proliferation. Here, we provide evidence that specific cells of the somatic gonadal sheath lineage influence amplification, differentiation, and the potential for tumorigenesis of the germ line. First, an interaction between the distal-most pair of sheath cells and the proliferation zone of the germ line is required for larval germline amplification. Second, we show that insufficient larval germline amplification retards gonad elongation and thus delays meiotic entry. Third, a more severe delay in meiotic entry, as is exhibited in certain mutant backgrounds, inappropriately juxtaposes undifferentiated germ cells with cells of the proximal sheath lineage, leading to the formation of a proximal germline tumor derived from undifferentiated germ cells. Tumors derived from dedifferentiated germ cells, however, respond to the proximal interaction differently depending on the mutant background. Our study underscores the importance of strict developmental coordination between neighboring tissues. We discuss these results in the context of mechanisms that may underlie tumorigenesis.