Somatic activation of Ras occurs frequently in human cancers, including one-third of lung cancers. Activating Ras mutations also occur in the germline, leading to complex developmental syndromes. The precise mechanism by which Ras activation results in human disease is uncertain. Here we describe the phenotype of a mouse engineered to harbor a germline oncogenic K-rasG12D mutation. This mouse exhibits early embryonic lethality due to a placental trophoblast defect. Reconstitution with a wild-type placenta rescues the early lethality, but mutant embryos still succumb to cardiovascular and hematopoietic defects. In addition, mutant embryos demonstrate a profound defect in lung branching morphogenesis associated with striking up-regulation of the Ras/mitogen-activated protein kinase (MAPK) antagonist Sprouty-2 and abnormal localization of MAPK activity within the lung epithelium. This defect can be significantly suppressed by lentiviral short hairpin RNA (shRNA)-mediated knockdown of Sprouty-2 in vivo. Furthermore, in the context of K-rasG12D-mediated lung tumorigenesis, Sprouty-2 is also up-regulated and functions as a tumor suppressor to limit tumor number and overall tumor burden. These findings indicate that in the lung, Sprouty-2 plays a critical role in the regulation of oncogenic K-ras, and implicate counter-regulatory mechanisms in the pathogenesis of Ras-based disease.