Hippo signaling and the activity of its transcriptional coactivator, Yorkie (Yki), are conserved and crucial regulators of tissue homeostasis. In the Drosophila midgut, after tissue damage, Yki activity increases to stimulate stem cell proliferation, but how Yki activity is turned off once the tissue is repaired is unknown. From an RNAi screen, we identified the septate junction (SJ) protein tetraspanin 2A (Tsp2A) as a tumor suppressor. Tsp2A undergoes internalization to facilitate the endocytic degradation of atypical protein kinase C (aPKC), a negative regulator of Hippo signaling. In the Drosophila midgut epithelium, adherens junctions (AJs) and SJs are prominent in intestinal stem cells or enteroblasts (ISCs or EBs) and enterocytes (ECs), respectively. We show that when ISCs differentiate toward ECs, Tsp2A is produced, participates in SJ assembly, and turns off aPKC and Yki-JAK-Stat activity. Altogether, our study uncovers a mechanism allowing the midgut to restore Hippo signaling and restrict proliferation once tissue repair is accomplished.