Myotonic Dystrophy type 1 (DM1) originates from alleles of the DMPK gene with hundreds of extra CTG repeats in the 3' untranslated region (3' UTR). CUG repeat RNAs accumulate in foci that sequester Muscleblind-like (MBNL) proteins away from their functional target transcripts. Endogenous upregulation of MBNL proteins is, thus, a potential therapeutic approach to DM1. Here we identify two miRNAs, dme-miR-277 and dme-miR-304, that differentially regulate muscleblind RNA isoforms in miRNA sensor constructs. We also show that their sequestration by sponge constructs derepresses endogenous muscleblind not only in a wild type background but also in a DM1 Drosophila model expressing non-coding CUG trinucleotide repeats throughout the musculature. Enhanced muscleblind expression resulted in significant rescue of pathological phenotypes, including reversal of several mis-splicing events and reduced muscle atrophy in DM1 adult flies. Rescued flies had improved muscle function in climbing and flight assays, and had longer lifespan compared to disease controls. These studies provide proof of concept for a similar potentially therapeutic approach to DM1 in humans.