Expression of human keratinocyte growth factor (KGF/FGF-7) was directed to epithelial cells of the developing embryonic lung of transgenic mice disrupting normal pulmonary morphogenesis during the pseudoglandular stage of development. By embryonic day 15.5(E15.5), lungs of transgenic surfactant protein C (SP-C)-KGF mice resembled those of humans with pulmonary cystadenoma. Lungs were cystic, filling the thoracic cavity, and were composed of numerous dilated saccules lined with glycogen-containing columnar epithelial cells. The normal distribution of SP-C proprotein in the distal regions of respiratory tubules was disrupted. Columnar epithelial cells lining the papillary structures stained variably and weakly for this distal respiratory cell marker. Mesenchymal components were preserved in the transgenic mouse lungs, yet the architectural relationship of the epithelium to the mesenchyme was altered. SP-C-KGF transgenic mice failed to survive gestation to term, dying before E17.5. Culturing mouse fetal lung explants in the presence of recombinant human KGF also disrupted branching morphogenesis and resulted in similar cystic malformation of the lung. Thus, it appears that precise temporal and spatial expression of KGF is likely to play a crucial role in the control of branching morphogenesis during fetal lung development.