Abstract: The extensive tests confirm gap formation and soil yielding at the pipe-soil interface during shield tunnelling. By incorporating the tension-free Winkler foundation model and the theory of pull-out and compressive bearing capacity of pipeline, the criteria for gap formation and soil yielding are introduced into the pipe-soil linear elastic interaction theory. A method for calculating the nonlinear pipe-soil interaction, accounting for gap formation and soil yielding, is derived and validated against the model tests. The parametric studies reveal that interface gap gets wider with the increasing flexural stiffness of pipeline. The pipeline response exhibits nonlinear changes as an increase in the volume loss due to pipe-soil separation and subgrade yielding. When the interface gap and yielding range are large in width, it significantly affects the pipeline response. Ignoring this effect may lead to overly conservative calculations of deflection and bending moments of pipeline.