Stem cells are critical for maintaining tissue homeostasis and are commonly governed by their niche microenvironment, although the intrinsic mechanisms controlling their multipotency are poorly understood. Polycomb group (PcG) genes are epigenetic silencers, and have emerged recently as important players in maintaining stem cell multipotency by preventing the initiation of differentiation programs. Here we describe an unexpected role of specific PcG genes in allowing adult stem cell differentiation and preventing stem cell-derived tumor development. We show that Posterior sex combs (Psc), which encodes a core Polycomb-repressive complex 1 (PRC1) component, functions redundantly with a similar gene, Suppressor of zeste two [Su(z)2], to restrict follicle stem cell (FSC) self-renewal in the Drosophila ovary. FSCs carrying deletion mutations of both genes extrude basally from the epithelium and continue to self-propagate at ectopic sites, leading to the development of FSC-like tumors. Furthermore, we show that the propagation of the mutant cells is driven by sustained activation of the canonical Wnt signaling pathway, which is essential for FSC self-renewal, whereas the epithelial extrusion is mediated through the planar cell polarity pathway. This study reveals a novel mechanism of epithelial extrusion, and indicates a novel role of polycomb function in allowing adult stem cell differentiation by antagonizing self-renewal programs. Given evolutionary conservation of PcG genes from Drosophila to mammals, they could have similar functions in mammalian stem cells and cancer.