The Toll and Toll-like receptor signaling pathways are evolutionarily conserved pathways that regulate innate immunity in insects and mammals. While efforts have been made to clarify the signal transduction events that occur during infection, much less is known about the components that maintain immune quiescence. Here we show that retromer, an intracellular protein complex known for regulating vesicle trafficking, functions in modulating the Toll pathway in Drosophila melanogaster. In mutant animals lacking retromer function, the Toll pathway but not JAK-STAT or IMD pathway is activated, triggering both cellular and humoral responses. Genetic epistasis and clonal analysis suggest that retromer regulates a component that acts upstream of Toll. Our data further show that in the mutant the Toll ligand Spätzle has a processing pattern similar to that of after infection. Together, the results suggest a novel function of retromer in regulating Toll pathway and innate immunity at a step that modulates ligand processing or activity.