In the mature mouse lung, the proximal-distal (P-D) axis is delineated by two distinct epithelial subpopulations: the proximal bronchiolar epithelium and the distal respiratory epithelium. Little is known about the signaling molecules that pattern the lung along the P-D axis. One candidate is Bone Morphogenetic Protein 4 (Bmp4), which is expressed in a dynamic pattern in the epithelial cells in the tips of growing lung buds. Previous studies in which Bmp4 was overexpressed in the lung endoderm (Bellusci, S., Henderson, R., Winnier, G., Oikawa, T. and Hogan, B. L. M. (1996) Development 122, 1693-1702) suggested that this factor plays an important role in lung morphogenesis. To further investigate this question, two complementary approaches were utilized to inhibit Bmp signaling in vivo. The Bmp antagonist Xnoggin and, independently, a dominant negative Bmp receptor (dnAlk6), were overexpressed using the surfactant protein C (Sp-C) promoter/enhancer. Inhibiting Bmp signaling results in a severe reduction in distal epithelial cell types and a concurrent increase in proximal cell types, as indicated by morphology and expression of marker genes, including the proximally expressed hepatocyte nuclear factor/forkhead homologue 4 (Hfh4) and Clara cell marker CC10, and the distal marker Sp-C. In addition, electron microscopy demonstrates the presence of ciliated cells, a proximal cell type, in the most peripheral regions of the transgenic lungs. We propose a model in which Bmp4 is a component of an apical signaling center controlling P-D patterning. Endodermal cells at the periphery of the lung, which are exposed to high levels of Bmp4, maintain or adopt a distal character, while cells receiving little or no Bmp4 signal initiate a proximal differentiation program.