We have found that the Drosophila gene vps25 possesses several properties of a tumor suppressor. First, vps25 mutant cells activate Notch and Dpp receptor signaling, inducing ectopic organizers in developing eyes and limbs and consequent overproliferation of both mutant and nearby wild-type cells. Second, as the mutant cells proliferate, they lose their epithelial organization and undergo apoptosis. Strikingly, when apoptosis of mutant cells is blocked, tumor-like overgrowths are formed that are capable of metastasis. vps25 encodes a component of the ESCRT-II complex, which sorts membrane proteins into multivesicular bodies during endocytic trafficking to the lysosome. Activation of Notch and Dpp receptor signaling in mutant cells results from an endocytic blockage that causes accumulation of these receptors and other signaling components in endosomes. These results highlight the importance of endocytic trafficking in regulating signaling and epithelial organization and suggest a possible role for ESCRT components in human cancer.