During development, proper differentiation and final organ size rely on the control of territorial specification and cell proliferation. Although many regulators of these processes have been identified, how both are coordinated remains largely unknown. The homeodomain Iroquois/Irx proteins play a key, evolutionarily conserved, role in territorial specification. Here we show that in the imaginal discs, reduced function of Iroquois genes promotes cell proliferation by accelerating the G1 to S transition. Conversely, their increased expression causes cell-cycle arrest, down-regulating the activity of the Cyclin E/Cdk2 complex. We demonstrate that physical interaction of the Iroquois protein Caupolican with Cyclin E-containing protein complexes, through its IRO box and Cyclin-binding domains, underlies its activity in cell-cycle control. Thus, Drosophila Iroquois proteins are able to regulate cell-autonomously the growth of the territories they specify. Moreover, our results provide a molecular mechanism for a role of Iroquois/Irx genes as tumour suppressors.