Stem cells depend on signals from cells within their microenvironment, or niche, as well as factors secreted by distant cells to regulate their maintenance and function. Here we show that Boi, a Hedgehog (Hh)-binding protein, is a novel suppressor of proliferation of follicle stem cells (FSCs) in the Drosophila ovary. Hh is expressed in apical cells, distant from the FSC niche, and diffuses to reach FSCs, where it promotes FSC proliferation. We show that Boi is expressed in apical cells and exerts its suppressive effect on FSC proliferation by binding to and sequestering Hh on the apical cell surface, thereby inhibiting Hh diffusion. Our studies demonstrate that cells distant from the local niche can regulate stem cell function through ligand sequestration, a mechanism that likely is conserved in other epithelial tissues.