The Drosophila insulin receptor (dInR) regulates cell growth and proliferation through the dPI3K/dAkt pathway, which is conserved in metazoan organisms. Here we report the identification and functional characterization of the Drosophila forkhead-related transcription factor dFOXO, a key component of the insulin signaling cascade. dFOXO is phosphorylated by dAkt upon insulin treatment, leading to cytoplasmic retention and inhibition of its transcriptional activity. Mutant dFOXO lacking dAkt phosphorylation sites no longer responds to insulin inhibition, remains in the nucleus, and is constitutively active. dFOXO activation in S2 cells induces growth arrest and activates two key players of the dInR/dPI3K/dAkt pathway: the translational regulator d4EBP and the dInR itself. Induction of d4EBP likely leads to growth inhibition by dFOXO, whereas activation of dInR provides a novel transcriptionally induced feedback control mechanism. Targeted expression of dFOXO in fly tissues regulates organ size by specifying cell number with no effect on cell size. Our results establish dFOXO as a key transcriptional regulator of the insulin pathway that modulates growth and proliferation.