A prevailing paradigm posits that Polycomb Group (PcG) proteins maintain stem cell identity by repressing differentiation genes, and abundant evidence points to an oncogenic role for PcG proteins in human cancer. Here we show using Drosophila melanogaster that a conventional PcG complex can also have a potent tumor suppressor activity. Mutations in any core PRC1 component cause pronounced hyperproliferation of eye imaginal tissue, accompanied by deregulation of epithelial architecture. The mitogenic JAK-STAT pathway is strongly and specifically activated in mutant tissue; activation is driven by transcriptional upregulation of Unpaired (Upd, also known as Outstretched, Os) family ligands. We show here that upd genes are direct targets of PcG-mediated repression in imaginal discs. Ectopic JAK-STAT activity is sufficient to induce overproliferation, whereas reduction of JAK-STAT activity suppresses the PRC1 mutant tumor phenotype. These findings show that PcG proteins can restrict growth directly by silencing mitogenic signaling pathways, shedding light on an epigenetic mechanism underlying tumor suppression.