Senescent cells may promote tumour progression through the activation of a senescence-associated secretory phenotype (SASP), whether these cells are capable of initiating tumourigenesis in vivo is not known. Expression of oncogenic β-catenin in Sox2+ young adult pituitary stem cells leads to formation of clusters of stem cells and induction of tumours resembling human adamantinomatous craniopharyngioma (ACP), derived from Sox2− cells in a paracrine manner. Here, we uncover the mechanisms underlying this paracrine tumourigenesis. We show that expression of oncogenic β-catenin in Hesx1+ embryonic precursors also results in stem cell clusters and paracrine tumours. We reveal that human and mouse clusters are analogous and share a common signature of senescence and SASP. Finally, we show that mice with reduced senescence and SASP responses exhibit decreased tumour-inducing potential. Together, we provide evidence that senescence and a stem cell-associated SASP drive cell transformation and tumour initiation in vivo in an age-dependent fashion.