Cell polarity plays an important role in tissue morphogenesis; however, the mechanisms of polarity and their role in mammalian development are still poorly understood. We show here that membrane-associated guanylate kinase protein Dlg5 is required for proper branching morphogenesis and progenitor differentiation in mammalian lung. We found that during lung development Dlg5 functions as an apical-basal polarity protein, which is necessary for the apical maintenance of atypical protein kinase C (aPKC). These results identify Dlg5 as a regulator of apical polarity complexes and uncover the critical function of Dlg5 in branching morphogenesis and differentiation of lung progenitor cells.