Occluding cell-cell junctions are pivotal during the development of many organs. One example is septate junction (SJ) strands, which are found in vertebrates and invertebrates. Although several proteins have been identified that are responsible for septate junction formation in Drosophila, it is presently unclear how these structures are formed or how they are positioned in a coordinated manner between two neighboring cells and within the tissue. Here, we identified a GPI-anchored protein called Undicht required for septate junction formation. Clonal analysis and rescue experiments show that Undicht acts in a non-cell-autonomous manner. It can be released from the plasma membrane by the proteolytic activity of two related ADAM10-like proteases, Kuzbanian and Kuzbanian-like. We propose that juxtacrine function of Undicht coordinates the formation of septate junction strands on two directly neighboring cells, whereas paracrine activity of Undicht controls the formation of occluding junctions within a tissue.