Intracellular protein transport is a key factor in epithelial cell polarity. Here we report that mutations in two core components of the vesicle trafficking machinery - a syntaxin and a Rab protein - cause an expansion of the apical membrane domain of Drosophila melanogaster epithelia; this polarity defect is coupled with overproliferation to form neoplastic tumours. Surprisingly, these proteins are associated with the endocytic, and not the exocytic, pathway. The syntaxin Avalanche (Avl) localizes to early endosomes, and loss of avl results in the cellular accumulation of specific membrane proteins, including the Notch signalling receptor and the polarity determinant Crumbs (Crb). Protein accumulation results from a failure in endosomal entry and progression towards lysosomal degradation; these and other avl phenotypes are also detected in Rab5 null mutant cells. Overexpression of Crb alone is sufficient to induce overproliferation of wild-type imaginal tissue, suggesting that polarity alterations in avl and Rab5 mutants directly contribute to tumour formation. Our findings reveal a critical and specific role for endocytic traffic in the control of both apico-basal polarity and cell proliferation.