The evolutionarily conserved Hippo signaling pathway is known to regulate cell proliferation and maintain tissue homeostasis during development. We found that activation of Yorkie (Yki), the effector of the Hippo signaling pathway, causes separable effects on growth and differentiation of theDrosophila eye. We present evidence supporting a role for Yki in suppressing eye fate by downregulation of the core retinal determination genes. Other upstream regulators of the Hippo pathway mediate this effect of Yki on retinal differentiation. Here, we show that, in the developing eye, Yki can prevent retinal differentiation by blocking morphogenetic furrow (MF) progression and R8 specification. The inhibition of MF progression is due to ectopic induction of Wingless (Wg) signaling and Homothorax (Hth), the negative regulators of eye development. Modulating Wg signaling can modify Yki-mediated suppression of eye fate. Furthermore, ectopic Hth induction due to Yki activation in the eye is dependent on Wg. Last, using Cut (Ct), a marker for the antennal fate, we show that suppression of eye fate by hyperactivation of yki does not change the cell fate (from eye to antenna-specific fate). In summary, we provide the genetic mechanism by which yki plays a role in cell fate specification and differentiation – a novel aspect of Yki function that is emerging from multiple model organisms.