Undifferentiated mesenchymal cells were isolated from mouse embryonic lungs and plated at subconfluent and confluent densities. During the first 5 hours in culture, all the cells were negative for smooth muscle markers. After 24 hours in culture, the mesenchymal cells that spread synthesized smooth muscle -actin, muscle myosin, desmin and SM22 in levels comparable to those of mature smooth muscle. The cells that did not spread remained negative for smooth muscle markers. SM differentiation was independent of cell-cell contact or proliferation. In additional studies, undifferentiated lung mesenchymal cells were cocultured with lung embryonic epithelial cells at high density. The epithelial cells aggregated into cysts surrounded by mesenchymal cells and a basement membrane was formed between the two cell types. In these cocultures, the mesenchymal cells in contact with the basement membrane spread and differentiated into smooth muscle. The rest of the mesenchymal cells remained round and negative for smooth muscle markers. Inhibition of laminin polymerization by an antibody to the globular regions of laminin β1/γ1 chains blocked basement membrane assembly, mesenchymal cell spreading and smooth muscle differentiation. These studies indicated that lung embryonic mesenchymal cells have the potential to differentiate into smooth muscle and the process is triggered by their spreading along the airway basement membrane.