Physical forces elicit biochemical signalling in a diverse array of cells, tissues and organisms, helping to govern fundamental biological processes. Several hypotheses have been advanced that link physical forces to intracellular signalling pathways, but in many cases the molecular mechanisms of mechanotransduction remain elusive. Here we find that compressive stress shrinks the lateral intercellular space surrounding epithelial cells, and triggers cellular signalling via autocrine binding of epidermal growth factor family ligands to the epidermal growth factor receptor. Mathematical analysis predicts that constant rate shedding of autocrine ligands into a collapsing lateral intercellular space leads to increased local ligand concentrations that are sufficient to account for the observed receptor signalling; direct experimental comparison of signalling stimulated by compressive stress versus exogenous soluble ligand supports this prediction. These findings establish a mechanism by which mechanotransduction arises from an autocrine ligand-receptor circuit operating in a dynamically regulated extracellular volume, not requiring induction of force-dependent biochemical processes within the cell or cell membrane.