The lungs are divided, both structurally and functionally, into two distinct components, the proximal airways, which conduct air, and the peripheral airways, which mediate gas exchange. The mechanisms that control the specification of these two structures during lung development are currently unknown. Here we show that -catenin signaling is required for the formation of the distal, but not the proximal, airways. When the gene for -catenin was conditionally excised in epithelial cells of the developing mouse lung prior to embryonic day 14.5, the proximal lung tubules grew and differentiated appropriately. The mice, however, died at birth because of respiratory failure. Analysis of the lungs by in situ hybridization and immunohistochemistry, using molecular markers of the epithelial and mesenchymal components of both proximal and peripheral airways, showed that the lungs were composed primarily of proximal airways. These observations establish, for the first time, both the sites and timing of specification of the proximal and peripheral airways in the developing lung, and that -catenin is one of the essential components of this specification.Lung morphogenesis depends upon precise regulation of reciprocal interactions between the endodermally derived respiratory epithelium and the surrounding lung mesenchyme. The primordial lung buds, derived from the foregut endoderm, invade the splanchnic mesenchyme at approximately embryonic (E) 1 9 to E9.5 in the developing mouse embryo. During the embryonic stage of development (E9.5 to E11.0), the buds undergo stereotypic branching to form the main stem and lobar bronchi. Extensive branching and budding of the airways continues throughout the pseudoglandular stage (E11.5 to E16.5), during which the intrapulmonary conducting airways and peripheral lung are formed. With advancing gestation, cytodifferentiation of distinct respiratory epithelial cell types occurs, producing the various cells lining the conducting (basal, ciliated, non-ciliated columnar, and neuroendocrine cells) and peripheral (alveolar Type I and Type II cells) airways. During the canalicular and saccular stages of lung development (E16.5 to E17.5 and E17.5 to postnatal day 4, respectively), the acinar tubules dilate into terminal alveolar saccules and the mesenchyme thins in association with formation of an extensive capillary network, forming the gas exchange region required for respiration after birth (1). Thus, formation of the lung is dependent upon precise temporal and spatial control of cell proliferation, migration, and differentiation, processes that are mediated by complex reciprocal interactions between cell types.