Fibroblast growth factors (FGFs) and receptors (FGFRs) are expressed in the developing lung and appear to be major regulators of lung growth and differentiation. By using mesenchyme-free lung epithelial cultures we show that FGF-1 (aFGF) and FGF-7 (KGF) produce different effects in the developing lung. FGF-1 stimulates epithelial proliferation that results in bud formation (branching), while FGF-7 promotes epithelial proliferation that leads to formation of cyst-like structures. In addition, FGF-7 stimulates epithelial differentiation, stimulating expression of SP-A and SP-B mRNA throughout the explant, and inducing formation of focal areas of highly differentiated cells. The FGF-1 effects on differentiation are limited to induction of surfactant protein SP-B mRNA at the tips of the explant. The FGF-induced patterns of growth appear to correlate with the distribution of epithelial FGFRs mRNAs; FGFR-2 IIIb (KGFR) is diffusely expressed in the day 11 lung epithelium, while FGFR-4 appears in distal but not in proximal sites. We propose that cyst-like structures may result from FGF-7 binding to the uniformly distributed FGFR-2-IIIb. Lung bud formation may be regulated by FGF-1 and/or other ligands binding to FGFR-2 and a distally located FGFR, such as FGFR-4, leading to an increasing binding and activation of FGFRs at the tips of the explant. Thus, in the embryonic lung epithelium, growth effects of FGFs appear to be dependent on location of FGFRs, while effects on differentiation are ligand-dependent.