Astrocytes are critically important for neuronal circuit assembly and function. Mammalian protoplasmic astrocytes develop a dense ramified meshwork of cellular processes to form intimate contacts with neuronal cell bodies, neurites, and synapses. This close neuron-glia morphological relationship is essential for astrocyte function, but it remains unclear how astrocytes establish their intricate morphology, organize spatial domains, and associate with neurons and synapses in vivo. Here we characterize a Drosophila glial subtype that shows striking morphological and functional similarities to mammalian astrocytes. We demonstrate that the Fibroblast growth factor (FGF) receptor Heartless autonomously controls astrocyte membrane growth, and the FGFs Pyramus and Thisbe direct astrocyte processes to ramify specifically in CNS synaptic regions. We further show that the shape and size of individual astrocytes are dynamically sculpted through inhibitory or competitive astrocyte-astrocyte interactions and Heartless FGF signaling. Our data identify FGF signaling through Heartless as a key regulator of astrocyte morphological elaboration in vivo.