Brain development in Drosophila is characterized by two neurogenic periods, one during embryogenesis and a second during larval life. Although much is known about embryonic neurogenesis, little is known about the genetic control of postembryonic brain development. Here we use mosaic analysis with a repressible cell marker (MARCM) to study the role of the brain tumor (brat) gene in neural proliferation control and tumour suppression in postembryonic brain development of Drosophila. Our findings indicate that overproliferation in brat mutants is due to loss of proliferation control in the larval central brain and not in the optic lobe. Clonal analysis indicates that the brat mutation affects cell proliferation in a cell-autonomous manner and cell cycle marker expression shows that cells of brat mutant clones show uncontrolled proliferation, which persists into adulthood. Analysis of the expression of molecular markers, which characterize cell types in wild-type neural lineages, indicates that brat mutant clones comprise an excessive number of cells, which have molecular features of undifferentiated progenitor cells that lack nuclear Prospero (Pros). pros mutant clones phenocopy brat mutant clones in the larval central brain, and targeted expression of wild-type pros in brat mutant clones promotes cell cycle exit and differentiation of brat mutant cells, thereby abrogating brain tumour formation. Taken together, our results provide evidence that the tumour suppressor brat negatively regulates cell proliferation during larval central brain development of Drosophila, and suggest that Prospero acts as a key downstream effector of brat in cell fate specification and proliferation control.