The Notch signaling pathway plays a central role in animal growth and patterning, and its deregulation leads to many human diseases, including cancer. Mutations in the tumor suppressor lethal giant discs (lgd) induce strong Notch activation and hyperplastic overgrowth of Drosophila imaginal discs. However, the gene that encodes Lgd and its function in the Notch pathway have not yet been identified. Here, we report that Lgd is a novel, conserved C2-domain protein that regulates Notch receptor trafficking. Notch accumulates on early endosomes in lgd mutant cells and signals in a ligand-independent manner. This phenotype is similar to that seen when cells lose endosomal-pathway components such as Erupted and Vps25. Interestingly, Notch activation in lgd mutant cells requires the early endosomal component Hrs, indicating that Hrs is epistatic to Lgd. These data suggest that Lgd affects Notch trafficking between the actions of Hrs and the late endosomal component Vps25. Taken together, our data identify Lgd as a novel tumor-suppressor protein that regulates Notch signaling by targeting Notch for degradation or recycling.