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-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. An siRNA 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.