We present evidence that the JAK-STAT signal transduction pathway regulates multiple developmental processes in Drosophila. We screened for second-site mutations that suppress the phenotype of the hyperactive hopTum-1 Jak kinase, and recovered a mutation that meiotically maps to the known chromosomal position of D-Stat, a Drosophila stat gene. This hypomorphic mutation, termed statHJ contains a nucleotide substitution in the first D-Stat intron, resulting in a reduction in the number of correctly processed transcripts. Further, the abnormally processed mRNA encodes a truncated protein that has a dominant negative effect on transcriptional activation by the wild-type cDNA in cell culture. statHJ mutants exhibit patterning defects that include the formation of ectopic wing veins, similar to those seen in mutants of the epidermal growth factor/receptor pathway. Abnormalities in embryonic and adult segmentation and in tracheal development were also observed. The hopTum-1 and statHJ mutations can partially compensate for each other genetically, and Hop overexpression can increase D-Stat transcriptional activity in vitro, indicating that the gene products interact in a common regulatory pathway.