Tissue homeostasis is a complex balance of developmental signals and environmental cues that dictate stem cell function. However, it remains poorly understood how nutrients interface with developmental pathways. Using the Drosophila midgut as a model we found that during the first four days of adult life, dietary lipids including cholesterol, determine how many enteroendocrine (ee) cells differentiate and persist in the posterior midgut where lipids are preferentially absorbed. The nuclear hormone receptor Hr96 which functions to control sterol trafficking, storage, and utilization, is required for sterol-mediated changes in ee number. Dietary cholesterol influences new intestinal epithelial cell differentiation from stem cells by altering the level and persistance of Notch signaling. Exogenous lipids modulate signaling by changing the stability of the Delta ligand and Notch intracellular domain and their trafficking in endosomal vesicles. Lipid-modulated Notch signaling occurs in other nutrient-dependent tissuessuch as the ovary, suggesting that Delta trafficking in many cells is sensitive to cellular sterol levels. These diet-mediated alterations in ee number in young animals contribute to a metabolic program adapted to the prevailing nutrient environment that persists after the diet changes. A low sterol diet also slows the proliferation of enteroendocrine tumors initiated by disruptions in the Notch pathway. These studies show that a specific dietary nutrient can modify a key intercellular signaling pathway to shift stem cell differentiation and cause lasting changes in tissue structure and physiology.3