During eye development in Drosophila, cell cycle progression is coordinated with differentiation. Prior to differentiation, cells arrest in G1 phase anterior to and within the morphogenetic furrow. We show that Decapentaplegic (Dpp), a TGF-&bgr; family member, is required to establish this G1 arrest, since Dpp-unresponsive cells located in the anterior half of the morphogenetic furrow show ectopic S phases and ectopic expression of the cell cycle regulators Cyclins A, E and B. Conversely, ubiquitous over-expression of Dpp in the eye imaginal disc transiently inhibits S phase without affecting Cyclin E or Cyclin A abundance. This Dpp-mediated inhibition of S phase occurs independently of the Cyclin A inhibitor Roughex and of the expression of Dacapo, a Cyclin E-Cdk2 inhibitor. Furthermore, Dpp-signaling genes interact genetically with a hypomorphic cyclin E allele. Taken together our results suggest that Dpp acts to induce G1 arrest in the anterior part of the morphogenetic furrow by a novel inhibitory mechanism. In addition, our results provide evidence for a Dpp-independent mechanism that acts in the posterior part of the morphogenetic furrow to maintain G1 arrest.