Lung development occurs under relative hypoxia and the most important oxygen-sensitive response pathway is driven by Hypoxia Inducible Factors (HIF). HIFs are heterodimeric transcription factors of an oxygen-sensitive subunit, HIFα, and a constitutively expressed subunit, HIF1β. HIF1α and HIF2α, encoded by two separate genes, contribute to the activation of hypoxia inducible genes. A third HIFα gene, HIF3α, is subject to alternative promoter usage and splicing, leading to three major isoforms, HIF3α, NEPAS and IPAS. HIF3α gene products add to the complexity of the hypoxia response as they function as dominant negative inhibitors (IPAS) or weak transcriptional activators (HIF3α/NEPAS). Previously, we and others have shown the importance of the Hif1α and Hif2α factors in lung development, and here we investigated the role of Hif3α during pulmonary development. Therefore, HIF3α was conditionally expressed in airway epithelial cells during gestation and although HIF3α transgenic mice were born alive and appeared normal, their lungs showed clear abnormalities, including a post-pseudoglandular branching defect and a decreased number of alveoli. The HIF3α expressing lungs displayed reduced numbers of Clara cells, alveolar epithelial type I and type II cells. As a result of HIF3α expression, the level of Hif2α was reduced, but that of Hif1α was not affected. Two regulatory genes, Rarβ, involved in alveologenesis, and Foxp2, a transcriptional repressor of the Clara cell specific Ccsp gene, were significantly upregulated in the HIF3α expressing lungs. In addition, aberrant basal cells were observed distally as determined by the expression of Sox2 and p63. We show that Hif3α binds a conserved HRE site in the Sox2 promoter and weakly transactivated a reporter construct containing the Sox2 promoter region. Moreover, Hif3α affected the expression of genes not typically involved in the hypoxia response, providing evidence for a novel function of Hif3α beyond the hypoxia response.