There is increasing evidence that epithelial–vascular interactions are essential for tissue patterning. Here we identified components of the molecular cross talk between respiratory epithelial cells and pulmonary capillaries necessary for the formation of the gas exchange surface of the lung. Selective inactivation of the Vegf-A gene in respiratory epithelium results in an almost complete absence of pulmonary capillaries, demonstrating the dependence of pulmonary capillary development on epithelium-derived Vegf-A. Deficient capillary formation in Vegf-A deficient lungs is associated with a defect in primary septae formation, a morphogenetic process critical for distal lung morphogenesis, coupled with suppression of epithelial cell proliferation and decreased hepatocyte growth factor (Hgf) expression. Lung endothelial cells express Hgf, and selective deletion of the Hgf receptor gene in respiratory epithelium phenocopies the malformation of septae, confirming the requirement for epithelial Hgf signaling in normal septae formation and suggesting that Hgf serves as an endothelium-derived factor that signals to the epithelium. Our findings support a mechanism for primary septae formation dependent on reciprocal interactions between respiratory epithelium and the underlying vasculature, establishing the dependence of pulmonary capillary development on epithelium-derived Vegf-A, and identify Hgf as a putative endothelium-derived factor that mediates the reciprocal signaling from the vasculature to the respiratory epithelium.