Recent studies suggest that mammalian hematopoietic stem and progenitor cells (HSPCs) respond directly to infection and inflammatory signaling. These signaling pathways also regulate HSPCs during steady-state conditions (absence of infection), and dysregulation may lead to cancer or age-related loss of progenitor repopulation capacity. Toll-like receptors (TLRs) are a major class of pathogen recognition receptors, and are expressed on the surface of immune effector cells and HSPCs. TLR/NF-κB activation promotes HSPCs differentiation; however, the mechanisms by which this signaling pathway alters the intrinsic transcriptional landscape are not well understood. Although Drosophila prohemocytes are the functional equivalent of mammalian HSPCs, a prohemocyte-specific function for Toll signaling has not been reported. Using Drosophila transgenics, we identified prohemocyte-specific roles for Toll pathway members, Dorsal and Cactus. We showed that Dorsal is required to limit the size of the progenitor pool. Additionally, we showed that activation of Toll signaling in prohemocytes drives differentiation in a manner that is analogous to TLR/NF-κB-driven HSPC differentiation. This was accomplished by showing that over-expression of Dorsal, or knockdown of Cactus, promotes differentiation. We also investigated whether Dorsal and Cactus control prohemocyte differentiation by regulating a key intrinsic prohemocyte factor, U-shaped (Ush), which is known to promote multipotency and block differentiation. We showed that Dorsal repressed Ush expression levels to promote differentiation, whereas Cactus maintained Ush levels to block differentiation. Additionally, we showed that another Toll antagonist, Lesswright, also maintained the level of Ush to block differentiation and promote proliferative quiescence. Collectively, these results identify a novel role for Ush as a downstream target of Toll signaling.