Disrupted lung alveolar myofibroblast and bronchial smooth muscle (BSM) cell development may lead to pulmonary disorders such as bronchopulmonary dysplasia. The molecular mechanisms that regulate BSM and alveolar myofibroblast development are not fully understood. Here we show that mSmile (murine Smile), a novel transmembrane protein with tetratricopeptide repeats, functions in lung alveolar myofibroblast and BSM cell development. mSmile mutant mice exhibit early neonatal lethality with few mice surviving up to 3 weeks. Mutant lungs display both airway branching morphogenesis defect during fetal lung development and alveolarization defect after birth. These defects are associated with reduced numbers of BSM cells in the peribronchial subepithelial region and clefts and myofibroblasts in alveolar septae. Expression of fibroblast growth factor‐10 and its down stream target Bmp‐4, which are important for BSM formation, is decreased. In vitro, mSmile mutant embryonic fibroblasts show reduced receptor activation and induction of myofibroblast formation in response to Transforming growth factor‐β (Tgf‐β), indicating that mSmile may mediate myofibroblast development through modulation of Tgf‐β signaling. These studies identify mSmile as a novel gene specifying both the BSM and lung alveolar myofibroblast lineages, contributing to our understanding of the biological control of the development of these cells, and may provide insights into the aberrant smooth muscle and alveolar myofibroblast development that occur in pathological conditions. Anat Rec, 2012. © 2011 Wiley Periodicals, Inc.