Phosphatase of Regenerating Liver (PRL) family members have emerged as molecular markers that significantly correlate to the ability of many cancers to metastasize. However, contradictory cellular responses to PRL expression have been reported, including the inhibition of cell cycle progression. An obvious culprit for the discrepancy is the use of dozens of different cell lines, including many isolated from tumors or cultured cells selected for immortalization which may have missing or mutated modulators of PRL function. We created transgenic Drosophila to study the effects of PRL overexpression in a genetically controlled, organismal model. Our data support the paradigm that the normal cellular response to high levels of PRL is growth suppression and furthermore, that PRL can counter oncogenic activity of Src. The ability of PRL to inhibit growth under normal conditions is dependent on a CAAX motif that is required to localize PRL to the apical edge of the lateral membrane. However, PRL lacking the CAAX motif can still associate indiscriminately with the plasma membrane and retains its ability to inhibit Src function. We propose that PRL binds to other membrane-localized proteins that are effectors of Src or to Src itself. This first examination of PRL in a model organism demonstrates that PRL performs as a tumor suppressor and underscores the necessity of identifying the conditions that enable it to transform into an oncogene in cancer.