Insufficiency of surfactants is a core factor in respiratory distress syndrome, which causes apnea and neonatal death, particularly in preterm infants. Surfactant proteins are secreted by alveolar type II cells in the lung epithelium, the differentiation of which is regulated by Fgf10 elaborated by the adjacent mesenchyme. However, the molecular regulation of mesenchymal Fgf10 during lung development has not been fully understood. Here, we show that Pbx1, a homeodomain transcription factor, is required in the lung mesenchyme for the expression of Fgf10. Mouse embryos lacking Pbx1 in the lung mesenchyme show compact terminal saccules and perinatal lethality with failure of postnatal alveolar expansion. Mutant embryos had severely reduced expression of Fgf10 and surfactant genes (Spa, Spb, Spc, and Spd) that are essential for alveolar expansion for gas exchange at birth. Molecularly, Pbx1 directly binds to the Fgf10 promoter and cooperates with Meis and Hox proteins to transcriptionally activate Fgf10. Our results thus show how Pbx1 controls Fgf10 in the developing lung. genesis 52:399–407, 2014. © 2014 Wiley Periodicals, Inc.