Mitochondria are key regulators of cellular homeostasis, and mitochondrial dysfunction is strongly linked to neurodegenerative diseases, including Alzheimer’s and Parkinson’s. Mitochondria communicate their bioenergetic status to the cell via mitochondrial retrograde signaling. To investigate the role of mitochondrial retrograde signaling in neurons, we induced mitochondrial dysfunction in the Drosophila nervous system. Neuronal mitochondrial dysfunction causes reduced viability, defects in neuronal function, decreased redox potential, and reduced numbers of presynaptic mitochondria and active zones. We find that neuronal mitochondrial dysfunction stimulates a retrograde signaling response that controls the expression of several hundred nuclear genes. We show that the Drosophila hypoxia inducible factor alpha (HIFα) ortholog Similar (Sima) regulates the expression of several of these retrograde genes, suggesting that Sima mediates mitochondrial retrograde signaling. Remarkably, knockdown of Sima restores neuronal function without affecting the primary mitochondrial defect, demonstrating that mitochondrial retrograde signaling is partly responsible for neuronal dysfunction. Sima knockdown also restores function in a Drosophila model of the mitochondrial disease Leigh syndrome and in a Drosophila model of familial Parkinson’s disease. Thus, mitochondrial retrograde signaling regulates neuronal activity and can be manipulated to enhance neuronal function, despite mitochondrial impairment.