In many developing tissues, adjacent cells diverge in character so as to create a fine-grained pattern of cells in contrasting states of differentiation. It has been proposed that such patterns can be generated through lateral inhibition--a type of cell-cell interaction whereby a cell that adopts a particular fate inhibits its immediate neighbors from doing likewise. Lateral inhibition is well documented in flies, worms and vertebrates. In all of these organisms, the transmembrane proteins Notch and Delta (or their homologues) have been identified as mediators of the interaction--Notch as receptor, Delta as its ligand on adjacent cells. However, it is not clear under precisely what conditions the Delta-Notch mechanism of lateral inhibition can generate the observed types of pattern, or indeed whether this mechanism is capable of generating such patterns by itself. Here we construct and analyse a simple and general mathematical model of such contact-mediated lateral inhibition. In accordance with experimental data, the model postulates that receipt of inhibition (i.e. activation of Notch) diminished the ability to deliver inhibition (i.e. to produce active Delta). This gives rise to a feedback loop that can amplify differences between adjacent cells. We investigate the pattern-forming potential and temporal behaviour of this model both analytically and through numerical simulation. Inhomogeneities are self-amplifying and develop without need of any other machinery, provided the feedback is sufficiently strong. For a wide range of initial and boundary conditions, the model generates fine-grained patterns similar to those observed in living systems.