BackgroundWool fibers are valuable materials for textile industry. Typical wool fibers are divided into medullated and non-medullated types, with the former generated from primary wool follicles and the latter by either primary or secondary wool follicles. The medullated wool is a common wool type in the ancestors of fine wool sheep before breeding. The fine wool sheep have a non-medullated coat. However, the critical period determining the type of wool follicles is the embryonic stage, which limits the phenotypic observation and variant contrast, making both selection and studies of wool type variation fairly difficult.ResultsDuring the breeding of a modern fine (MF) wool sheep population with multiple-ovulation and embryo transfer technique, we serendipitously discovered lambs with ancestral-like coarse (ALC) wool. Whole-genome resequencing confirmed ALC wool lambs as a variant type from the MF wool population. We mapped the significantly associated methylation locus on chromosome 4 by using whole genome bisulfite sequencing signals, and in turn identified theSOSTDC1gene as exons hypermethylated in ALC wool lambs compare to their half/full sibling MF wool lambs. Transcriptome sequencing found thatSOSTDC1was expressed dozens of times more in ALC wool lamb skin than that of MF and was at the top of all differentially expressed genes. An analogy with the transcriptome of coarse/fine wool breeds revealed that differentially expressed genes and enriched pathways at postnatal lamb stage in ALC/MF were highly similar to those at the embryonic stage in the former. Further experiments validated that theSOSTDC1gene was specifically highly expressed in the nucleus of the dermal papilla of primary wool follicles.ConclusionIn this study, we conducted genome-wide differential methylation site association analysis on differential wool type trait, and located the only CpG locus that strongly associated with primary wool follicle development. Combined with transcriptome analysis,SOSTDC1was identified as the only gene at this locus that was specifically overexpressed in the primary wool follicle stem cells of ALC wool lamb skin. The discovery of this key gene and its epigenetic regulation contributes to understanding the domestication and breeding of fine wool sheep.Supplementary InformationThe online version contains supplementary material available at 10.1186/s40104-023-00893-6.