The intestinal tract maintains proper function by replacing aged cells with freshly produced cells that arise from a population of self-renewing intestinal stem cells (ISCs). In the mammalian intestine, ISC self renewal, amplification and differentiation take place along the crypt-villus axis, and are controlled by the Wnt and hedgehog (Hh) signalling pathways. However, little is known about the mechanisms that specify ISCs within the developing intestinal epithelium, or about the signalling centres that help maintain them in their self-renewing stem cell state. Here we show that in adult Drosophila melanogaster, ISCs of the posterior intestine (hindgut) are confined to an anterior narrow segment, which we name the hindgut proliferation zone (HPZ). Within the HPZ, self renewal of ISCs, as well as subsequent proliferation and differentiation of ISC descendants, are controlled by locally emanating Wingless (Wg, a Drosophila Wnt homologue) and Hh signals. The anteriorly restricted expression of Wg in the HPZ acts as a niche signal that maintains cells in a slow-cycling, self-renewing mode. As cells divide and move posteriorly away from the Wg source, they enter a phase of rapid proliferation. During this phase, Hh signal is required for exiting the cell cycle and the onset of differentiation. The HPZ, with its characteristic proliferation dynamics and signalling properties, is set up during the embryonic phase and becomes active in the larva, where it generates all adult hindgut cells including ISCs. The mechanism and genetic control of cell renewal in the Drosophila HPZ exhibits a large degree of similarity with what is seen in the mammalian intestine. Our analysis of the Drosophila HPZ provides an insight into the specification and control of stem cells, highlighting the way in which the spatial pattern of signals that promote self renewal, growth and differentiation is set up within a genetically tractable model system.