Lung development requires reciprocal epithelial/mesenchymal interactions, mediated by signaling factors such as Bmps made in both cell populations. To address the role of Bmp signaling in the epithelium, we have exploited the fact that Bmp receptor type Ia (Alk3) is expressed in the epithelium during branching morphogenesis. Deletion of Bmpr1a in the epithelium with an Sftpc-cre transgene leads to dramatic defects in lung development. There is reduced epithelial proliferation, extensive apoptosis, changes in cell morphology and extrusion of cells into the lumen. By E18.5, there are fewer Type II cells than normal, and the lung contains large fluid-filled spaces. If cell death is prevented by making embryos homozygous null for the proapoptotic gene, Bax, the epithelial cells that are rescued can apparently differentiate, but normal morphogenesis is not restored. To determine whether Bmps made by the epithelium can function in an autocrine manner, mesenchyme-free endoderm was cultured in Matrigel with Fgfs. Under these conditions, the mutant epithelium fails to undergo secondary budding. Abnormal development was also seen when Bmp4 was specifically deleted in the epithelium using the Sftpc-cre transgene. Our results support a model in which Bmp signaling primarily regulates the proliferation, survival and morphogenetic behavior of distal lung epithelial cells.