The reproducible pattern of organismal growth during metazoan development is the product of genetically controlled signaling pathways. Patterned activation of these pathways shapes developing organs and dictates overall organismal shape and size. Here, we show that patches of tissue that are mutant for the Drosophila Tsg101 ortholog, erupted, cause dramatic overproliferation of adjacent wild-type tissue. Tsg101 proteins function in endosomal sorting and are required to incorporate late endosomes into multivesicular bodies. Drosophila cells with impaired Tsg101 function show accumulation of the Notch receptor in intracellular compartments marked by the endosomal protein Hrs. This causes increased Notch-mediated signaling and ectopic expression of the Notch target gene unpaired (upd), which encodes the secreted ligand of the JAK-STAT pathway. Activation of JAK-STAT signaling in surrounding wild-type cells correlates with their overgrowth. These findings define a pathway by which changes in endocytic trafficking can regulate tissue growth in a non-cell-autonomous manner.