Although cellular tumor-suppression mechanisms are widely studied, little is known about mechanisms that act at the level of tissues to suppress the occurrence of aberrant cells in epithelia. We find that ectopic expression of transcription factors that specify cell fates causes abnormal epithelial cysts in Drosophila imaginal discs. Cysts do not form cell autonomously but result from the juxtaposition of two cell populations with divergent fates. Juxtaposition of wild-type and aberrantly specified cells induces enrichment of actomyosin at their entire shared interface, both at adherens junctions as well as along basolateral interfaces. Experimental validation of 3D vertex model simulations demonstrates that enhanced interface contractility is sufficient to explain many morphogenetic behaviors, which depend on cell cluster size. These range from cyst formation by intermediate-sized clusters to segregation of large cell populations by formation of smooth boundaries or apical constriction in small groups of cells. In addition, we find that single cells experiencing lateral interface contractility are eliminated from tissues by apoptosis. Cysts, which disrupt epithelial continuity, form when elimination of single, aberrantly specified cells fails and cells proliferate to intermediate cell cluster sizes. Thus, increased interface contractility functions as error correction mechanism eliminating single aberrant cells from tissues, but failure leads to the formation of large, potentially disease-promoting cysts. Our results provide a novel perspective on morphogenetic mechanisms, which arise from cell-fate heterogeneities within tissues and maintain or disrupt epithelial homeostasis.