The formation and maintenance of complex organs requires segregation of distinct cell populations into defined territories (that is, cell sorting) and the establishment of boundaries between them. Here we have investigated the mechanism by which Eph/ephrin signalling controls the compartmentalization of cells in epithelial tissues. We show that EphB/ephrin-B signalling in epithelial cells regulates the formation of E-cadherin-based adhesions. EphB receptors interact with E-cadherin and with the metalloproteinase ADAM10 at sites of adhesion and their activation induces shedding of E-cadherin by ADAM10 at interfaces with ephrin-B1-expressing cells. This process results in asymmetric localization of E-cadherin and, as a consequence, in differences in cell affinity between EphB-positive and ephrin-B-positive cells. Furthermore, genetic inhibition of ADAM10 activity in the intestine of mice results in a lack of compartmentalization of Paneth cells within the crypt stem cell niche, a defect that phenocopies that of EphB3-null mice. These results provide important insights into the regulation of cell migration in the intestinal epithelium and may help in the understanding of the nature of the cell sorting process in other epithelial tissues where Eph-ephrin interactions play a central role.