Optomechanical systems, in which light drives and is affected by the motion of a massive object, will comprise a new framework for nonlinear quantum optics, with applications ranging from the storage and transduction of quantum information to enhanced detection sensitivity in gravitational wave detectors. However, quantum optical effects in optomechanical systems have remained obscure, because their detection requires the object’s motion to be dominated by vacuum fluctuations in the optical radiation pressure; so far, direct observations have been stymied by technical and thermal noise. Here we report an implementation of cavity optomechanics using ultracold atoms in which the collective atomic motion is dominantly driven by quantum fluctuations in radiation pressure. The back-action of this motion onto the cavity light field produces ponderomotive squeezing. We detect this quantum phenomenon by measuring sub-shot-noise optical squeezing. Furthermore, the system acts as a low-power, high-gain, nonlinear parametric amplifier for optical fluctuations, demonstrating a gain of 20 dB with a pump corresponding to an average of only seven intracavity photons. These findings may pave the way for low-power quantum optical devices, surpassing quantum limits on position and force sensing, and the control and measurement of motion in quantum gases.