Morphogenesis of the lung is regulated by reciprocal signaling between epithelium and mesenchyme. In previous studies, we have shown that FGF9 signals are essential for lung mesenchyme development. Using Fgf9loss-of-function and inducible gain-of-function mouse models, we show that lung mesenchyme can be divided into two distinct regions: the sub-mesothelial and sub-epithelial compartments, which proliferate in response to unique growth factor signals. Fibroblast growth factor (FGF) 9 signals from the mesothelium (the future pleura) to sub-mesothelial mesenchyme through both FGF receptor (FGFR) 1 and FGFR2 to induce proliferation. FGF9 also signals from the epithelium to the sub-epithelial mesenchyme to maintain SHH signaling,which regulates cell proliferation, survival and the expression of mesenchymal to epithelial signals. We further show that FGF9 represses peribronchiolar smooth muscle differentiation and stimulates vascular development in vivo. We propose a model in which FGF9 and SHH signals cooperate to regulate mesenchymal proliferation in distinct submesothelial and subepithelial regions. These data provide a molecular mechanism by which mesothelial and epithelial FGF9 directs lung development by regulating mesenchymal growth, and the pattern and expression levels of mesenchymal growth factors that signal back to the epithelium.