The restoration of homeostasis after tissue damage relies on proper spatial-temporal control of damage-induced apoptosis and compensatory proliferation. In Drosophila imaginal discs these processes are coordinated by the stress response pathway JNK. We demonstrate that JNK signaling induces a dose-dependent extension of G2 in tissue damage and tumors, resulting in either transient stalling or a prolonged but reversible cell cycle arrest. G2-stalling is mediated by downregulation of the G2/M-specific phosphatase String(Stg)/Cdc25. Ectopic expression of stg is sufficient to suppress G2-stalling and reveals roles for stalling in survival, proliferation and paracrine signaling. G2-stalling protects cells from JNK-induced apoptosis, but under chronic conditions, reduces proliferative potential of JNK-signaling cells while promoting non-autonomous proliferation. Thus, transient cell cycle stalling in G2 has key roles in wound healing but becomes detrimental upon chronic JNK overstimulation, with important implications for chronic wound healing pathologies or tumorigenic transformation.