Embryonic stem cells (ESCs) are a potential source for the cell‐based therapy of a wide variety of lung diseases for which the only current treatment is transplantation. However, distal lung epithelium, like many other endodermally derived somatic cell lineages, is proving difficult to obtain from both murine and human ESCs. We have previously obtained alveolar epithelium from ESCs, although final cell yield remained extremely low. Here, we present an optimized three‐step protocol for the derivation of distal lung epithelial cells from murine ESCs. This protocol incorporates (a) treatment of early differentiating embryoid bodies with activin A to enhance the specification of the endodermal germ layer, followed by (b) adherent culture in serum‐free medium and (c) the final application of a commercial, lung‐specific medium. As well as enhancing the specification of distal lung epithelium, this protocol was found to yield cells with a phenotype most closely resembling that of lung‐committed progenitor cells present in the foregut endoderm and the early lung buds during embryonic development. This is in contrast to our previous differentiation method, which drives differentiation through to mature type II alveolar epithelial cells. The derivation of a committed lung progenitor cell type from ESCs is particularly significant for regenerative medicine because the therapeutic implantation of progenitor cells has several clear advantages over the transplantation of mature, terminally differentiated somatic cells.