Excessive transforming growth factor (TGF)-beta signaling has been implicated in pulmonary hypoplasia associated with bronchopulmonary dysplasia, a chronic lung disease of human prematurity featuring pulmonary fibrosis. This implies that inhibitors of TGF-beta could be useful therapeutic agents. Because exogenous TGF-beta ligands are known to inhibit lung branching morphogenesis and cytodifferentiation in mouse embryonic lungs in ex vivo culture, we examined the capacity of a naturally occurring inhibitor of TGF-beta activity, the proteoglycan decorin, to overcome the inhibitory effects of exogenous TGF-beta. Intratracheal microinjection of a recombinant adenovirus containing decorin cDNA resulted in overexpression of the exogenous decorin gene in airway epithelium. Although exogenous TGF-beta efficiently decreased epithelial lung branching morphogenesis in control cultures, TGF-beta-induced inhibition of lung growth was abolished after epithelial transfer of the decorin gene. Additionally, exogenous TGF-beta-induced antiproliferative effects as well as the downregulation of surfactant protein C were abrogated by decorin in cultured embryonic lungs. Moreover, lung branching inhibition by TGF-beta could be restored by the addition of decorin antisense oligodeoxynucleotides in culture, indicating that decorin is both specifically and directly involved in suppressing TGF-beta-mediated negative regulation of lung morphogenesis. Our findings suggest that decorin can antagonize bioactive TGF-beta during lung growth and differentiation, establishing the rationale for decorin as a candidate therapeutic approach to ameliorate excessive levels of TGF-beta signaling in the developing lung.