The Hippo pathway regulates contact inhibition of cell proliferation and, ultimately, organ size in diverse multicellular organisms. Inactivation of the Hippo pathway promotes nuclear localization of the transcriptional coactivator Yap1, a Hippo pathway effector, and can cause cancer. Here, we show that deletion of αE (α epithelial) catenin in the hair follicle stem cell compartment resulted in the development of skin squamous cell carcinoma in mice. Tumor formation was accelerated by simultaneous deletion of αE-catenin and the tumor suppressor–encoding gene p53. A small interfering RNA screen revealed a functional connection between αE-catenin and Yap1. By interacting with Yap1, αE-catenin promoted its cytoplasmic localization, and Yap1 showed constitutive nuclear localization in αE-catenin–null cells. We also found an inverse correlation between αE-catenin abundance and Yap1 activation in human squamous cell carcinoma tumors. These findings identify αE-catenin as a tumor suppressor that inhibits Yap1 activity and sequesters it in the cytoplasm.