The constant self renewal and differentiation of adult intestinal stem cells maintains a functional intestinal mucosa for a lifetime. However, the molecular mechanisms that regulate intestinal stem cell division and epithelial homeostasis are largely undefined. We report here that the small GTPases Cdc42 and Rab8a are critical regulators of these processes in mice. Conditional ablation of Cdc42 in the mouse intestinal epithelium resulted in the formation of large intracellular vacuolar structures containing microvilli (microvillus inclusion bodies) in epithelial enterocytes, a phenotype reminiscent of human microvillus inclusion disease (MVID), a devastating congenital intestinal disorder that results in severe nutrient deprivation. Further analysis revealed that Cdc42-deficient stem cells had cell division defects, reduced capacity for clonal expansion and differentiation into Paneth cells, and increased apoptosis. Cdc42 deficiency impaired Rab8a activation and its association with multiple effectors, and prevented trafficking of Rab8a vesicles to the midbody. This impeded cytokinesis, triggering crypt apoptosis and disrupting epithelial morphogenesis. Rab8a was also required for Cdc42-GTP activity in the intestinal epithelium, where continued cell division takes place. Furthermore, mice haploinsufficient for both Cdc42 and Rab8a in the intestine demonstrated abnormal crypt morphogenesis and epithelial transporter physiology, further supporting their functional interaction. These data suggest that defects of the stem cell niche can cause MVID. This hypothesis represents a conceptual departure from the conventional view of this disease, which has focused on the affected enterocytes, and suggests stem cell-based approaches could be beneficial to infants with this often lethal condition.