Merlin, the protein product of the Neurofibromatosis type-2 gene, acts as a tumour suppressor in mice and humans. Merlin is an adaptor protein with a FERM domain and it is thought to transduce a growth-regulatory signal. However, the pathway through which Merlin acts as a tumour suppressor is poorly understood. Merlin, and its function as a negative regulator of growth, is conserved in Drosophila, where it functions with Expanded, a related FERM domain protein. Here, we show that Drosophila Merlin and Expanded are components of the Hippo signalling pathway, an emerging tumour-suppressor pathway. We find that Merlin and Expanded, similar to other components of the Hippo pathway, are required for proliferation arrest and apoptosis in developing imaginal discs. Our genetic and biochemical data place Merlin and Expanded upstream of Hippo and identify a pathway through which they act as tumour-suppressor genes.