The US researchers have pinpointed the mutation which leads to hair thinning, a process that can begin as early as childhood.
APCDD1 causes hair follicles to shrink, leading to thinner hair described as "peach fuzz".
The team found that the progressive form of hair loss, a relatively rare condition known as hereditary hypotrichosis simplex, is caused by a phenomenon called hair follicle miniaturisation.
Those follicles affected by the process shrink or narrow, causing the thick hair on the head to be replaced by thin, fine hair.
Dr Angela Christiano, professor of dermatology and genetics and development at Columbia University Medical Centre, said: "The identification of this gene underlying hereditary hypotrichosis simplex has afforded us an opportunity to gain insight into the process of hair follicle miniaturisation, which is most commonly observed in male pattern hair loss or androgenetic alopecia.
"It is important to note that while these two conditions share the same physiologic process, the gene for hereditary hypotrichosis does not explain the complex process of male pattern baldness."
The team, drawn from universities at Columbia, Rockerfeller and Stanford, analysed data from families in Pakistan and Italy who have the condition. They identified a common mutation in the APCDD1 gene, which is located in a region on a chromosome 18 linked in previous studies to hair loss, including androgenetic alopecia and alopecia areata.
The gene inhibits a signal pathway known as Wnt known to control hair growth in mice, but has only now been linked to the human condition. Dr Christiano added: "We have at last made a connection between Wnt signalling and human hair disease that is highly significant.
"We have years of data in our field about hair growth in mice, but this is the first inroad into showing that the same pathway is critical in human hair growth. This is the first mutation in a Wnt inhibitor that deregulates the pathway in a human hair disease.
"Furthermore, these findings suggest that manipulating the Wnt pathway may have an effect on hair follicle growth – for the first time, in humans."
She said the research could lead to more people undergoing hair loss treatments.
"Unlike commonly available treatments that involve blocking hormonal pathways, treatments involving the Wnt pathway would be non-hormonal, which may enable many more people suffering from hair loss to receive such therapies," she explained.
The findings are reported in the current issue of Nature.