Vascular endothelial growth factor (VEGF) was expressed in developing respiratory epithelial cells under control of the promoter from the human surfactant protein C (SP‐C) gene. SP‐C‐VEGF transgenic mice did not survive after birth. When obtained by hysterectomy on embryonic day 15 (E15) or 17 (E17), abnormalities in the transgenic mice were confined to the lung and were correlated with the expression of transgene mRNA as revealed by in situ hybridization. On E15 and E17, marked abnormalities in lung morphogenesis were observed in transgenic mice. Lungs consisted of large dilated tubules with increased peritubular vascularity. The mRNA levels of the VEGF receptor, Flk‐1, and the endothelial cell specific receptor tyrosine kinase, Tie‐1, were increased in lung mesenchyme of the transgenic mice. The numbers of acinar tubules and the abundance of mesenchyme were decreased. Endogenous VEGF mRNA was expressed in the respiratory epithelial cells of the developing lungs, and the levels of VEGF mRNA were increased in the SP‐C‐VEGF transgenic mice. Although the normal pattern of immunostaining for SP‐C and Clara cell secretory protein (CCSP) indicated that epithelial cell differentiation was relatively unaltered by the transgene, electron microscopic analysis revealed a lack of alveolar Type I cell differentiation at E18. Expression of VEGF in the developing respiratory epithelium of transgenic mice increased growth of the pulmonary blood vessels, disrupted branching morphogenesis of the lung and inhibited Type I cell differentiation. Dev. Dyn. 1998;211:215–227. © 1998 Wiley‐Liss, Inc.