Contact inhibition is a fundamental process in multicellular organisms aimed at inhibiting proliferation at high cellular densities through poorly characterized intracellular signals, despite availability of growth factors. We have previously identified the protein kinase p38alpha as a novel regulator of contact inhibition, as p38alpha is activated upon cell-cell contacts and p38alpha-deficient cells are impaired in both confluence-induced proliferation arrest and p27(Kip1) accumulation. Here, we establish that p27(Kip1) plays a key role downstream of p38alpha to arrest proliferation at high cellular densities. Surprisingly, p38alpha does not directly regulate p27(Kip1) expression levels but leads indirectly to confluent upregulation of p27(Kip1) and cell cycle arrest via the inhibition of mitogenic signals originating from the epidermal growth factor receptor (EGFR). Hence, confluent activation of p38alpha uncouples cell proliferation from mitogenic stimulation by inducing EGFR degradation through downregulation of the EGFR-stabilizing protein Sprouty2 (Spry2). Accordingly, confluent p38alpha-deficient cells fail to downregulate Spry2, providing them in turn with sustained EGFR signaling that facilitates cell overgrowth and oncogenic transformation. Our results provide novel mechanistic insight into the role of p38alpha as a sensor of cell density, which induces confluent cell cycle arrest via the Spry2-EGFR-p27(Kip1) network.