The tumor suppressor protein merlin is thought to regulate cell proliferation and cell adhesion through interaction with protein partners. Loss of merlin is associated with Neurofibromatosis Type 2 (NF2) tumors. NHERF1 or EBP50 is a scaffolding protein that functions in apical organization of polarized cells. Merlin and NHERF1 have been shown to interact in vitro in vertebrates. We investigate how the Drosophila NHERF1 orthologue, Sip1, and Merlin function to regulate cell proliferation and adhesion. We identify two conserved arginine residues (R325 and R335) in Merlin which, in addition to the FERM domain, are required for interaction with Sip1. Mutation of the arginine residues result in reduced Sip1 binding to Merlin and loss of Merlin growth suppressor function. Over-expression of Merlin(R325A) and/or Merlin(R335L) in Drosophila wings result in increased proliferation in the adult wing (increase in size), which is rescued by co-over-expression of constitutively active Merlin protein. Reduced Sip1 binding to Merlin also produces defects in adhesion in follicle epithelial cells. Sip1 facilitates the activation of Merlin as a tumor suppressor protein. Thus, our work provides insight into how Merlin functions as a tumor suppressor and in adhesion and this provides insight into the mechanism of NF2 pathogenesis. Developmental Dynamics 243:1554-1570 , 2014. © 2014 Wiley Periodicals, Inc.