Construction of the brain is one of the most complex developmental challenges. Wnt signals shape all tissues, including the brain, and the tumor suppressor adenomatous polyposis coli (APC) is a key negative regulator of Wnt/Wingless (Wg) signaling. We carried out the first assessment of the role of APC proteins in brain development, simultaneously inactivating both APC1 and APC2 in clones of cells in the Drosophila larval optic lobe. We focused on the medulla, where epithelial neural progenitors shift from symmetric to asymmetric divisions across the lateral-medial axis. Loss of both APCs triggers dramatic defects in optic lobe development. Double mutant cells segregate from wild-type neighbors, while double mutant neurons form tangled axonal knots, suggesting changes in cell adhesion. Strikingly, phenotypes are graded along the anterior-posterior axis. Activation of Wg signaling downstream of APC mimics these phenotypes, a dominant-negative TCF blocks them, and a known Wg target, decapentaplegic, is activated in double mutant clones, strongly suggesting that the phenotypes result from activated Wg signaling. We also explored the roles of classic cadherins in differential adhesion. Finally, we propose a model suggesting that Wg signaling regulates fine scale cell fates along the anterior-posterior axis, in part by creating an adhesion gradient and consider possible alternate explanations for our observations.