Tight junctions in mammals and septate junctions in insects are essential for epithelial integrity. We show here that, in the Drosophila intestine, smooth septate junction proteins provide barrier and signaling functions. During an RNAi screen for genes that regulate adult midgut tissue growth, we found that loss of two smooth septate junction components, Snakeskin and Mesh, caused a hyperproliferation phenotype. By examining epitope-tagged endogenous Snakeskin and Mesh, we demonstrate that the two proteins are present in the cytoplasm of differentiating enteroblasts and in cytoplasm and septate junctions of mature enterocytes. In both enteroblasts and enterocytes, loss of Snakeskin and Mesh causes Yorkie-dependent expression of the JAK-STAT pathway ligand Upd3, which in turn promotes proliferation of intestinal stem cells. Snakeskin and Mesh form a complex with each other, with other septate junction proteins and with Yorkie. Therefore, the Snakeskin-Mesh complex has both barrier and signaling function to maintain stem cell-mediated tissue homeostasis.