Appropriate cell-cell signaling is crucial for proper tissue homeostasis. Protein sorting of cell surface receptors at the early endosome is important for both the delivery of the signal and the inactivation of the receptor, and its alteration can cause malignancies including cancer. In a genetic screen for suppressors of the pro-apoptotic gene hid in Drosophila, we identified two alleles of vps25, a component of the ESCRT machinery required for protein sorting at the early endosome. Paradoxically, although vps25 mosaics were identified as suppressors of hid-induced apoptosis, vps25 mutant cells die. However, we provide evidence that a non-autonomous increase of Diap1 protein levels, an inhibitor of apoptosis, accounts for the suppression of hid. Furthermore, before they die, vps25 mutant clones trigger non-autonomous proliferation through a failure to downregulate Notch signaling, which activates the mitogenic JAK/STAT pathway. Hid and JNK contribute to apoptosis of vps25 mutant cells. Inhibition of cell death in vps25 clones causes dramatic overgrowth phenotypes. In addition, Hippo signaling is increased in vps25 clones, and hippo mutants block apoptosis in vps25 clones. In summary, the phenotypic analysis of vps25 mutants highlights the importance of receptor downregulation by endosomal protein sorting for appropriate tissue homeostasis, and may serve as a model for human cancer.