A Landau-Ginsburg-Devonshire-type nonlinear phenomenological theory is presented, which enables the thermodynamic description of dense laminar polydomain states in epitaxial ferroelectric thin films. The theory explicitly takes into account the mechanical substrate effect on the polarizations and lattice strains in dissimilar elastic domains (twins). Numerical calculations are performed for PbTiO 3 and BaTiO 3 films grown on (001)-oriented cubic substrates. The "misfit strain-temperature" phase diagrams are developed for these films, showing stability ranges of various possible polydomain and single-domain states. Three types of polarization instabilities are revealed for polydomain epitaxial ferroelectric films, which may lead to the formation of new polydomain states forbidden in bulk crystals. The total dielectric and piezoelectric small-signal responses of polydomain films are calculated, resulting from both the volume and domainwall contributions. For BaTiO 3 films, strong dielectric anomalies are predicted at room temperature near special values of the misfit strain.