E-cadherin has been linked to the suppression of tumor growth and the inhibition of cell proliferation in culture. We observed that progressively decreasing the seeding density of normal rat kidney-52E (NRK-52E) or MCF-10A epithelial cells from confluence, indeed, released cells from growth arrest. Unexpectedly, a further decrease in seeding density so that cells were isolated from neighboring cells decreased proliferation. Experiments using microengineered substrates showed that E-cadherin engagement stimulated the peak in proliferation at intermediate seeding densities, and that the proliferation arrest at high densities did not involve E-cadherin, but rather resulted from a crowding-dependent decrease in cell spreading against the underlying substrate. Rac1 activity, which was induced by E-cadherin engagement specifically at intermediate seeding densities, was required for the cadherin-stimulated proliferation, and the control of Rac1 activation by E-cadherin was mediated by p120-catenin. Together, these findings demonstrate a stimulatory role for E-cadherin in proliferative regulation, and identify a simple mechanism by which cell-cell contact may trigger or inhibit epithelial cell proliferation in different settings.