GATA6 is a member of the GATA family of zinc-finger transcriptional regulators and is the only known GATA factor expressed in the distal epithelium of the lung during development. To define the role that GATA6 plays during lung epithelial cell development, we expressed a GATA6-Engrailed dominant-negative fusion protein in the distal lung epithelium of transgenic mice. Transgenic embryos lacked detectable alveolar epithelial type 1 cells in the distal airway epithelium. These embryos also exhibited increased Foxp2 gene expression, suggesting a disruption in late alveolar epithelial differentiation. Alveolar epithelial type 2 cells, which are progenitors of alveolar epithelial type 1 cells, were correctly specified as shown by normal thyroid transcription factor 1 and surfactant protein A gene expression. However, attenuated endogenous surfactant protein C expression indicated that alveolar epithelial type 2 cell differentiation was perturbed in transgenic embryos. The number of proximal airway tubules is also reduced in these embryos, suggesting a role for GATA6 in regulating distal-proximal airway development. Finally, a functional role for GATA factor function in alveolar epithelial type 1 cell gene regulation is supported by the ability of GATA6 to trans-activate the mouse aquaporin-5 promoter. Together, these data implicate GATA6 as an important regulator of distal epithelial cell differentiation and proximal airway development in the mouse.