The PAF complex (PAFC) coordinates transcription elongation and mRNA processing and its CDC73/parafibromin subunit functions as a tumour suppressor. The NF2/Merlin tumour suppressor functions both at the cell cortex and nucleus and is a key mediator of contact inhibition but the molecular mechanisms remain unclear. In this study we have used affinity proteomics to identify novel Merlin interacting proteins and show that Merlin forms a complex with multiple proteins involved in RNA processing including the PAFC and the CHD1 chromatin remodeller. Tumour-derived inactivating mutations in both Merlin and the CDC73 PAFC subunit mutually disrupt their interaction and growth suppression by Merlin requires CDC73. Merlin interacts with the PAFC in a cell density-dependent manner and we identify a role for FAT cadherins in regulating the Merlin-PAFC interaction. Our results suggest that in addition to its function within the Hippo pathway, Merlin is part of a tumour suppressor network regulated by cell-cell adhesion which coordinates post-initiation steps of the transcription cycle of genes mediating contact inhibition.