The structure and functions of the airways of the lung change dramatically along their lengths. Large-diameter conducting airways are supported by cartilaginous rings and smooth muscle tissue and are lined by ciliated and secretory epithelial cells that are involved in mucociliary clearance. Smaller peripheral airways formed during branching morphogenesis are lined by cuboidal and squamous cells that facilitate gas exchange to a network of fine capillaries. The factors that mediate formation of these changing cell types and structures along the length of the airways are unknown. We report here that conditional expression of fibroblast growth factor (FGF)-18 in epithelial cells of the developing lung caused the airway to adopt structural features of proximal airways. Peripheral lung tubules were markedly diminished in numbers, whereas the size and extent of conducting airways were increased. Abnormal smooth muscle and cartilage were found in the walls of expanded distal airways, which were accompanied by atypically large pulmonary blood vessels. Expression of proteins normally expressed in peripheral lung tubules, including SP-B and pro-SP-C, was inhibited. FGF-18 mRNA was detected in normal mouse lung in stromal cells surrounding proximal airway cartilage and in peripheral lung mesenchyme. Effects were unique to FGF-18 because expression of other members of the FGF family had different consequences. These data show that FGF-18 is capable of enhancing proximal and inhibiting peripheral programs during lung morphogenesis.