Little is known about stem cells in organisms at the beginning of evolution. To characterize the regulatory events that control stem cells in the basal metazoan Hydra, we have generated transgenics which express eGFP selectively in the interstitial stem cell lineage. Using them we visualized stem cell and precursor migration in real-time in the context of the native environment. We demonstrate that interstitial cells respond to signals from the cellular environment, and that Wnt and Notch pathways are key players in this process. Furthermore, by analyzing polyps which overexpress the Polycomb protein HyEED in their interstitial cells, we provide in vivo evidence for a role of chromatin modification in terminal differentiation. These findings for the first time uncover insights into signalling pathways involved in stem cell differentiation in the Bilaterian ancestor; they demonstrate that mechanisms controlling stem cell behaviour are based on components which are conserved throughout the animal kingdom.