Sleep during development is involved in refining brain circuitry, but a role for sleep in the earliest periods of nervous system elaboration, when neurons are first being born, has not been explored. Here we identify a sleep state in Drosophila larvae that coincides with a major wave of neurogenesis. Mechanisms controlling larval sleep are partially distinct from adult sleep: octopamine, the Drosophila analog of mammalian norepinephrine, is the major arousal neuromodulator in larvae, but dopamine is not required. Using real-time behavioral monitoring in a closed-loop sleep deprivation system, we find that sleep loss in larvae impairs cell division of neural progenitors. This work establishes a system uniquely suited for studying sleep during nascent periods, and demonstrates that sleep in early life regulates neural stem cell proliferation., eLife digest Nearly all animals sleep more while they are still developing, suggesting that sleep is important in early life. Previous studies have shown that sleep may be required for building connections in the brain. However, it has been difficult to study the effects of sleep in earlier stages of brain development, when stem cells divide to create brain cells in a process known as “neurogenesis”. This is partly because, in mammals, most neurogenesis occurs in the womb. Scientists have successfully studied sleep using the common fruit fly. But these studies have so far focused on adult flies, in which neurogenesis is mostly complete. Fly larvae, on the other hand, are widely used to study brain development and neurogenesis. Compared to mammals in the womb, fruit fly larvae are very easy to access and manipulate. However, unlike adult flies, no one had previously looked to see if larvae even display a behaviour that would fit the definition of sleep. To see if fruit fly larvae do sleep, Szuperak et al. created the “LarvaLodge”, an apparatus in which individual larvae can be housed while having their activity monitored over time. In these lodges, a bright light was used to test how hard it is to arouse inactive fruit fly larvae, and further experiments asked what happens when larvae are prevented from resting. Then, to look at neurogenesis in the larvae, Szuperak et al. used a stain that labels dividing stem cells within the nervous system. Those cells could then be seen and counted when a larva was dissected and examined under a microscope. The results from the LarvaLodge showed that fruit fly larvae do indeed sleep: they have extended periods of rest during which they react less to outside disturbances and adopt a particular posture (they retract their heads towards their bodies). Also when larvae were deprived of sleep, by shining a light or shaking, they compensated by sleeping more afterwards. Importantly, depriving the larvae of sleep also led to lower levels of neurogenesis. These findings establish the fruit fly larva as a new and useful system for studying the role of sleep in early development, and may help shed light on the role sleep plays in disorders affecting brain development.