The Toll signaling pathway has a highly conserved function in innate immunity and is regulated by multiple factors that fine tune its activity. One such factor is beta-arrestin Kurtz (Krz), which we previously implicated in the inhibition of developmental Toll signaling in the Drosophila melanogaster embryo. Another level of controlling Toll activity and immune system homeostasis is by protein sumoylation. In this study, we have uncovered a link between these two modes of regulation and show that Krz affects sumoylation via a conserved protein interaction with a SUMO protease, Ulp1. Loss of function of krz or Ulp1 in Drosophila larvae results in a similar inflammatory phenotype, which is manifested as increased lamellocyte production; melanotic mass formation; nuclear accumulation of Toll pathway transcriptional effectors, Dorsal and Dif; and expression of immunity genes, such as Drosomycin. Moreover, mutations in krz and Ulp1 show dosage-sensitive synergistic genetic interactions, suggesting that these two proteins are involved in the same pathway. Using Dorsal sumoylation as a readout, we found that altering Krz levels can affect the efficiency of SUMO deconjugation mediated by Ulp1. Our results demonstrate that beta-arrestin controls Toll signaling and systemic inflammation at the level of sumoylation.