Stem cells often rely on signals from a niche, which in many tissues adopts a precise morphology. What remains elusive is how niches are formed, and how niche morphology impacts its function. To address this, we leverage the Drosophila gonadal niche, which affords genetic tractability and live-imaging. We have previously shown mechanisms dictating niche cell migration to their appropriate position within the gonad, and the resultant consequences on niche function. Here, utilizing a combination of fixed and live-imaging approaches, we show that once positioned, niche cells robustly polarize filamentous actin (F-actin) and Non-muscle Myosin II (MyoII) towards neighboring germ cells. We utilize laser severing of the actomyosin network to reveal polarized actomyosin tension along the niche periphery. By manipulating actomyosin contractility (AMC) with a combination of pharmacological and transgenic approaches, we find that this tension generates a highly reproducible smoothened niche contour. Without contractility, niches are misshapen and exhibit functional defects in their ability to limit self-renewal signals and regulate germline stem cell divisions. We additionally examined the upstream mechanisms that polarize MyoII along the niche periphery. By ablating germ cells and inhibiting their division, we show that germ cells aid in polarizing MyoII within niche cells, and that extrinsic input is required for niche morphogenesis and function. Our work reveals a feedback mechanism where stem cells shape the niche that guides their behavior.