Myotonic dystrophy type 1 (DM1) is a neuromuscular disorder caused by a CTG expansion in the 3′ UTR of the dystrophia myotonica protein kinase (DMPK) gene. It has been hypothesized that the pathogenesis in DM1 is triggered by a toxic gain of function of the expanded DMPK RNA. This expanded RNA is retained in nuclear foci where it sequesters and induces alterations in the levels of RNA-binding proteins (RNA-BP). To model DM1 and study the implication of RNA-BP in CUG-induced toxicity, we have generated a Drosophila DM1 model expressing a non-coding mRNA containing 480 interrupted CUG repeats; i.e. [(CUG)₂₀CUCGA]₂₄. This (iCUG)₄₈₀ transcript accumulates in nuclear foci and its expression leads to muscle wasting and degeneration in Drosophila. We also report that altering the levels of two RNA-BP known to be involved in DM1 pathogenesis, MBNL1 and CUGBP1, modify the (iCUG)₄₈₀ degenerative phenotypes. Expanded CUG-induced toxicity in Drosophila is suppressed when MBNL1 expression levels are increased, and enhanced when MBNL1 levels are reduced. In addition, (iCUG)₄₈₀ also causes a decrease in the levels of soluble MBNL1 that is sequestered in the CUG-containing nuclear foci. In contrast, increasing the levels of CUGBP1 worsens (iCUG)₄₈₀-induced degeneration even though CUGBP1 distribution is not altered by the expression of the expanded triplet repeat. Our data supports a mechanism for DM1 pathogenesis in which decreased levels of MBNL and increased levels of CUGBP mediate the RNA-induced toxicity observed in DM1. Perhaps more importantly, they also provide proof of the principle that CUG-induced muscle toxicity can be suppressed.