Abstract: 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 pipeline pull-out and compressive bearing capacity theory, criteria for gap formation and soil yielding are introduced into the pipe-soil linear elastic interaction theory. A calculation method for nonlinear pipe-soil interaction, accounting for gap formation and soil yielding, is derived and validated against model tests. Parametric studies reveal that interface gap gets wider with increased pipeline flexural stiffness. Pipeline response exhibits nonlinear changes as an increase in volume loss due to pipe-soil separation and subgrade yielding. When interface gap and yielding range are significant, it significantly affects the pipeline response. Ignoring this effect may lead to overly conservative calculations of pipeline deflection and bending moments.