Morphogenesis in the Drosophila retina initiates at the posterior margin of the eye imaginal disc by an unknown mechanism. Upon initiation, a wave of differentiation, its forward edge marked by the morphogenetic furrow (MF), proceeds anteriorly across the disc. Progression of the MF is driven by hedgehog (hh), expressed by differentiating photoreceptor cells. The TGF-beta homolog encoded by decapentaplegic (dpp) is expressed at the disc's posterior margin prior to initiation and in the furrow, under the control of hh, during MF progression. While dpp has been implicated in eye disc growth and morphogenesis, its precise role in retinal differentiation has not been determined. To address the role of dpp in initiation and progression of retinal differentiation we analyzed the consequences of reduced and increased dpp function during eye development. We find that dpp is not only required for normal MF initiation, but is sufficient to induce ectopic initiation of differentiation. Inappropriate initiation is normally inhibited by wingless (wg). Loss of dpp function is accompanied by expansion of wg expression, while increased dpp function leads to loss of wg transcription. In addition, dpp is required to maintain, and sufficient to induce, its own expression along the disc's margins. We postulate that dpp autoregulation and dpp-mediated inhibition of wg expression are required for the coordinated regulation of furrow initiation and progression. Finally, we show that in the later stages of retinal differentiation, reduction of dpp function leads to an arrest in MF progression.