Cell rearrangement, accompanied by the rapid assembly and disassembly of cadherin-mediated cell adhesions, plays essential roles in epithelial morphogenesis. Various in vitro and cell culture studies on the small GTPase Rac have suggested it to be a key regulator of cell adhesion, but this notion needs to be verified in the context of embryonic development. We used the tracheal system of Drosophila to investigate the function of Rac in the epithelial cell rearrangement, with a special attention to its role in regulating epithelial cadherin activity. We found that a reduced Rac activity led to an expansion of cell junctions in the embryonic epidermis and tracheal epithelia, which was accompanied by an increase in the amount of Drosophila E-Cadherin-Catenin complexes by a post-transcriptional mechanism. Reduced Rac activity inhibited dynamic epithelial cell rearrangement. Hyperactivation of Rac, on the other hand, inhibited assembly of newly synthesized E-Cadherin into cell junctions and caused loss of tracheal cell adhesion, resulting in cell detachment from the epithelia. Thus, in the context of Drosophila tracheal development, Rac activity must be maintained at a level necessary to balance the assembly and disassembly of E-Cadherin at cell junctions. Together with its role in cell motility, Rac regulates plasticity of cell adhesion and thus ensures smooth remodeling of epithelial sheets into tubules.