During tissue morphogenesis, simple epithelial sheets undergo folding to form complex structures. The prevailing model underlying epithelial folding involves cell shape changes driven by myosin-dependent apical constriction. Here we describe an alternative mechanism that requires differential positioning of adherens junctions controlled by modulation of epithelial apical-basal polarity. Using live embryo imaging, we show that before the initiation of dorsal transverse folds during Drosophila gastrulation, adherens junctions shift basally in the initiating cells, but maintain their original subapical positioning in the neighbouring cells. Junctional positioning in the dorsal epithelium depends on the polarity proteins Bazooka and Par-1. In particular, the basal shift that occurs in the initiating cells is associated with a progressive decrease in Par-1 levels. We show that uniform reduction of the activity of Bazooka or Par-1 results in uniform apical or lateral positioning of junctions and in each case dorsal fold initiation is abolished. In addition, an increase in the Bazooka/Par-1 ratio causes formation of ectopic dorsal folds. The basal shift of junctions not only alters the apical shape of the initiating cells, but also forces the lateral membrane of the adjacent cells to bend towards the initiating cells, thereby facilitating tissue deformation. Our data thus establish a direct link between modification of epithelial polarity and initiation of epithelial folding.