How stem cells generate both differentiating and self-renewing daughter cells is unclear. Here, we show that Drosophila larval neuroblasts-stem cell-like precursors of the adult brain-regulate proliferation by segregating the growth inhibitor Brat and the transcription factor Prospero into only one daughter cell. Like Prospero, Brat binds and cosegregates with the adaptor protein Miranda. In larval neuroblasts, both Brat and Prospero are required to inhibit self-renewal in one of the two daughter cells. While Prospero regulates cell-cycle gene transcription, Brat acts as a posttranscriptional inhibitor of dMyc. In brat or prospero mutants, both daughter cells grow and behave like neuroblasts leading to the formation of larval brain tumors. Similar defects are seen in lethal giant larvae (lgl) mutants where Brat and Prospero are not asymmetric. We have identified a molecular mechanism that may control self-renewal and prevent tumor formation in other stem cells as well.