Notch and its ligands mediate short-range cell interactions that play a conserved role in inducing cell fate specification. Several regulatory mechanisms have been described to ensure robust polarized signaling from signal-sending to signal-receiving cells. High levels of ligand expression activate Notch in nearby cells and exert a cell-autonomous dominant-negative effect on Notch activity. This regulatory process is called cis-inhibition and helps to restrict Notch activation to signal-receiving cells. By combining genetic mosaics in the Drosophila wing primordium with cell culture assays, we present evidence here that Notch promotes the clearance of Serrate ligand from the cell surface and exerts an inhibitory effect on the activity of Serrate expressed in the same cell. These regulatory mechanisms are independent of Notch-mediated transcription and are executed by the extracellular domain of Notch. We show that this process is required to block Serrate-mediated activation of Notch in the signal-sending cell population and helps to restrict Notch activation to the signal-receiving cells. Altogether, our results, in concert with previous results on ligand-mediated Notch cis-inhibition, indicate that mutual inhibition between ligand and receptor in signal-sending cells helps to block Notch activity in these cells and to restrict receptor activation in signal-receiving cells.