Fras1 is a putative extracellular matrix protein that has been implicated in the structural adhesion of embryonic epidermis to dermis. Moreover, mutations in Fras1/FRAS1 have been associated with the mouse blebbed phenotype and the human rare genetic disorder Fraser syndrome, respectively. Here we report the mapping of Fras1 within the extracellular space and evaluate the effects of Fras1 deficiency on lung development in the mouse. Expression of Fras1 was detected in the mesothelial cells of the visceral pleura and in the conducting airway epithelia. Immunogold histochemistry identified Fras1 as a component of the extracellular matrix localized below the lamina densa of epithelial basement membranes in the embryonic lung. Embryos homozygous for a targeted mutation of Fras1 exhibited fused pulmonary lobes resulting from incomplete separation during development as well as a profound disarrangement of blood capillaries in the terminal air sacs. We demonstrate that loss of Fras1 causes alterations in the molecular composition of basement membranes, concomitant with local disruptions of epithelial-endothelial contacts and extravasation of erythrocytes into the embryonic respiratory lumen. Thus, our findings identify Fras1 as an important structural component of the sub-lamina densa of basement membranes required for lobar septation and the organization of blood capillaries in the peripheral lung.