Insects have evolved an efficient innate immune system to fight both pathogens and to ensure cellular and organismal homeostasis. Drosophila hemocytes perform cellular reactions not only via phagocytosis and encapsulation, but they also release soluble factors (e.g., antimicrobial peptides and cytokines) to induce humoral responses. Furthermore, they engage in coagulation and wounding, and in development. Recent genome wide transcriptome studies identified several immune molecules in humoral and/or cellular pathways involved in nematode infection in Drosophila. To shed light on cellular immunity during nematode infection, we eliminated hemocytes by overexpressing the pro-apoptotic genes hid and grim (hml-apo larvae). Surprisingly, we find that although hml-apo larvae contain fewer plasmatocytes and crystal cells (the two hemocyte subtypes present in naïve larvae) they are resistant to nematode infections. Further characterization of hml-apo larvae shows a shift in immune effector pathways including massive lamellocyte differentiation, melanotic nodule formation, induction of Toll as well as repression of imd-signaling. This leads to a pro-inflammatory state. In addition, pupal lethality, and leg defects in adult escapers are found. Most of the phenotypes are alleviated upon administration of antibiotics and changing food source suggesting an involvement of the microbiota. We find that nitric oxide acts as a key regulator in this process. Finally we show that the substrate for nitric oxide synthase L-arginine similarly modulates the response towards an early stage of tumor progression in fly larvae.