Maintenance of stem cells requires spatially restricted, niche-associated signals. In the Drosophila female germline stem cell (GSC) niche, Decapentaplegic (DPP) is the primary niche-associated factor and functions over a short range to promote GSC self-renewal rather than differentiation. Here, we show that the GSC lineage and, more specifically, the stem cells themselves participate in the spatial restriction of DPP function by activating epidermal growth factor receptor (EGFR)-mitogen-activated protein kinase (MAPK) signaling in the surrounding somatic cells. EGFR-MAPK signaling in somatic cells repressed the expression of dally, which encodes a glypican required for DPP movement and stability. Consequently, only GSCs close to the DPP source (the somatic cells in the niche) showed high signal activation and were maintained as stem cells, whereas cystoblasts outside the niche showed low signal activation and initiated differentiation. Thus, our data reveal that the reciprocal crosstalk between the GSCs and the somatic cells defines the spatial limits of DPP action and therefore the extent of the GSC niche.