E-cadherin is an important adhesion molecule whose loss is associated with progression and poor prognosis of liver cancer. However, it is unclear whether the loss of E-cadherin is a real culprit or a bystander in liver cancer progression. In addition, the precise role of E-cadherin in maintaining liver homeostasis is also still unknown, especially in vivo. Here we demonstrate that liver-specific E-cadherin knockout mice develop spontaneous periportal inflammation via an impaired intrahepatic biliary network, as well as periductal fibrosis, which resembles primary sclerosing cholangitis. Inducible gene knockout studies identified E-cadherin loss in biliary epithelial cells as a causal factor of cholangitis induction. Furthermore, a few of the E-cadherin knockout mice developed spontaneous liver cancer. When knockout of E-cadherin is combined with Ras activation or chemical carcinogen administration, E-cadherin knockout mice display markedly accelerated carcinogenesis and an invasive phenotype associated with epithelial–mesenchymal transition, up-regulation of stem cell markers, and elevated ERK activation. Also in human hepatocellular carcinoma, E-cadherin loss correlates with increased expression of mesenchymal and stem cell markers, and silencing of E-cadherin in hepatocellular carcinoma cell lines causes epithelial–mesenchymal transition and increased invasiveness, suggesting that E-cadherin loss can be a causal factor of these phenotypes. Thus, E-cadherin plays critical roles in maintaining homeostasis and suppressing carcinogenesis in the liver.