We tested the hypothesis that innate immune signaling in utero could disrupt the structural development of the fetal lung, contributing to the pathogenesis of bronchopulmonary dysplasia. Injection of Escherichia coli lipopolysaccharide (LPS) into the amniotic fluid of E15 BALB/cJ mice increased the luminal volume density of fetal mouse lungs at embryonic day (E) 17 and E18. LPS also increased luminal volume and decreased distal lung branching in fetal mouse lung explants. This effect required NF‐κB activation and functional Toll‐Like Receptor 4. Airway branching may require fibronectin‐dependent epithelial–mesenchymal interactions, representing a potential target for innate immune signaling. Anti‐fibronectin antibodies and LPS both blocked distal lung branching. By immunofluorescence, fibronectin localized to the clefts between newly formed airways but was restricted to peripheral mesenchymal cells in LPS‐exposed explants. These data suggest that LPS may alter the expression pattern of mesenchymal fibronectin, potentially disrupting epithelial–mesenchymal interactions and inhibiting distal airway branching and alveolarization. This mechanism may link innate immune signaling with defects in structural development of the fetal lung. Developmental Dynamics 233:553–561, 2005. © 2005 Wiley‐Liss, Inc.