The Drosophila RNase Z(L) (dRNaseZ) gene encodes a member of the ELAC1/ELAC2 protein family with homologs in every living organism. All RNase Z proteins tested so far were found to possess endoribonuclease activity, which is responsible for the removal of a 3' trailer from a primary tRNA transcript. Given that tRNA 3'-end processing has been delineated using in vitro, bacterial and cell culture models, its relevance to RNase Z functions in vivo has yet to be established. In this study, we employed heritable RNA interference (RNAi) in combination with the GAL4/UAS system to spatiotemporally knockdown the dRNaseZ gene and study its biological role in cells of a developing fruit fly. We found that dRNaseZ is an essential gene, as ubiquitous knockdown caused growth arrest and early larval lethality. Molecular analysis confirmed that dRNaseZ is necessary for 3'-end processing of nuclear and mitochondrial tRNAs: knockdown larvae displayed significant accumulation of both types of processing intermediates with extensions at the 3' end. This is the first in vivo demonstration of RNase Z(L) dependent tRNA processing in the context of a metazoan model organism. Using tissue-specific GAL4 drivers, we also showed that in mitotically growing imaginal discs dRNaseZ is required for cell proliferation and/or viability, but not for the maintenance of their differentiated progeny. In endoreplicating salivary glands, dRNaseZ controls organ size by supporting cell growth but not DNA replication. Although the mechanisms remain unclear, our results support the notion that RNase Z(L) is involved in biological pathways regulating cell growth and proliferation.