β-Catenin is essential for E-cadherin–mediated cell adhesion in epithelial cells, but it also forms nuclear complexes with high mobility group transcription factors. Using a mouse mammary epithelial cell system, we have shown previously that conversion of epithelial cells to a fibroblastoid phenotype (epithelial-mesenchymal transition) involves downregulation of E-cadherin and upregulation of β-catenin transcriptional activity. Here, we demonstrate that transient expression of exogenous E-cadherin in both epithelial and fibroblastoid cells arrested cell growth or caused apoptosis, depending on the cellular E-cadherin levels. By expressing E-cadherin subdomains, we show that the growth-suppressive effect of E-cadherin required the presence of its cytoplasmic β-catenin interaction domain and/or correlated strictly with the ability to negatively interfere with β-catenin transcriptional activity. Furthermore, coexpression of β-catenin or lymphoid enhancer binding factor-1 or T cell factor 3 with E-cadherin rescued β-catenin transcriptional activity and counteracted E-cadherin–mediated cell cycle arrest. Stable expression of E-cadherin in fibroblastoid cells decreased β-catenin activity and reduced cell growth. Since proliferating cells had a higher β-catenin activity than G1 phase–arrested or contact-inhibited cells, we conclude that β-catenin transcriptional activity is essential for cell proliferation and can be controlled by E-cadherin in a cell adhesion-independent manner.