An extracellular serine protease cascade generates the ligand that activates the Toll signaling pathway to establish dorsoventral polarity in the Drosophila embryo. We show here that this cascade is regulated by a serpin-type serine protease inhibitor, which plays an essential role in confining Toll signaling to the ventral side of the embryo. This role is strikingly analogous to the function of the mammalian serpin antithrombin in localizing the blood-clotting cascade, suggesting that serpin inhibition of protease activity may be a general mechanism for achieving spatial control in diverse biological processes.