PIWI proteins and their bound PIWI-interacting RNAs (piRNAs) are found in animal germlines and are essential for fertility, but their functions outside of the gonad are not well understood. The cnidarian Hydra is a simple metazoan with well-characterized stem/progenitor cells that provides a unique model for analysis of PIWI function. Here we report that Hydra has two PIWI proteins, Hydra PIWI (Hywi) and Hydra PIWI-like (Hyli), both of which are expressed in all Hydra stem/progenitor cells, but not in terminally differentiated cells. We identified ∼15 million piRNAs associated with Hywi and/or Hyli and found that they exhibit the ping-pong signature of piRNA biogenesis. Hydra PIWI proteins are strictly cytoplasmic and thus likely act as posttranscriptional regulators. To explore this function, we generated a Hydra transcriptome for piRNA mapping. piRNAs map to transposons with a 25- to 35-fold enrichment compared with the abundance of transposon transcripts. By sequencing the small RNAs specific to the interstitial, ectodermal, and endodermal lineages, we found that the targeting of transposons appears to be largely restricted to the interstitial lineage. We also identified putative nontransposon targets of the pathway unique to each lineage. Finally we demonstrate that hywi function is essential in the somatic epithelial lineages. This comprehensive analysis of the PIWI-piRNA pathway in the somatic stem/progenitor cells of a nonbilaterian animal suggests that this pathway originated with broader stem cell functionality.