Stem cell competition has emerged as a mechanism for selecting fit stem cells/progenitors and controlling tumourigenesis. However, little is known about the underlying molecular mechanism. Here we identify Mlf1-adaptor molecule (Madm), a novel tumour suppressor that regulates the competition between germline stem cells (GSCs) and somatic cyst stem cells (CySCs) for niche occupancy. Madm knockdown results in overexpression of the EGF receptor ligand vein (vn), which further activates EGF receptor signalling and integrin expression non-cell autonomously in CySCs to promote their overproliferation and ability to outcompete GSCs for niche occupancy. Conversely, expressing a constitutively activated form of the Drosophila JAK kinase (hop(Tum-l)) promotes Madm nuclear translocation, and suppresses vn and integrin expression in CySCs that allows GSCs to outcompete CySCs for niche occupancy and promotes GSC tumour formation. Tumour suppressor-mediated stem cell competition presented here could be a mechanism of tumour initiation in mammals.