Epithelial branching morphogenesis is an essential process in living organisms, through which organ-specific epithelial shapes are created. Interactions between epithelial cells and their stromal microenvironment instruct branching morphogenesis but remain incompletely understood. Here, we employed fibroblast-organoid or fibroblast-spheroid co-culture systems and time-lapse imaging to reveal that physical contact between fibroblasts and epithelial cells and fibroblast contractility are required to induce mammary epithelial branching. Pharmacological inhibition of ROCK or non-muscle myosin II, or fibroblast-specific knock-out of Myh9 abrogate fibroblast-induced epithelial branching. The process of fibroblast-induced branching requires epithelial proliferation and is associated with distinctive epithelial patterning of yes associated protein (YAP) activity along organoid branches, which is dependent on fibroblast contractility. Moreover, we provide evidence for the in vivo existence of contractile fibroblasts specifically surrounding terminal end buds (TEBs) of pubertal murine mammary glands, advocating for an important role of fibroblast contractility in branching in vivo. Together, we identify fibroblast contractility as a novel stromal factor driving mammary epithelial morphogenesis. Our study contributes to comprehensive understanding of overlapping but divergent employment of mechanically active fibroblasts in developmental versus tumorigenic programs. Epithelial branching morphogenesis is an essential process in living organisms, creating organ-specific epithelial shapes. This study uses time-lapse imaging of fibroblast co-cultures with epithelial organoids or spheroids to reveal that fibroblast contact and contractility are required for epithelial branching.