Experimental evidence is rapidly emerging that the coupling of positive regulatory signals with the induction of negative feedback modulators is a mechanism of fine regulation in development. Studies in Drosophila and chick have shown that members of the SPROUTY family are inducible negative regulators of growth factors that act through tyrosine kinase receptors. We and others have shown that Fibroblast Growth Factor 10 (FGF10) is a key positive regulator of lung branching morphogenesis. Herein, we provide direct evidence that mSprouty2 is dynamically expressed in the peripheral endoderm in embryonic lung and is downregulated in the clefts between new branches at E12.5. We found that mSprouty2 was expressed in a domain restricted in time and space, adjacent to that of Fgf10 in the peripheral mesenchyme. By E14.5, Fgf10 expression was restricted to a narrow domain of mesenchyme along the extreme edges of the individual lung lobes, whereas mSprouty2 was most highly expressed in the subjacent epithelial terminal buds. FGF10 beads upregulated the expression of mSprouty2 in adjacent epithelium in embryonic lung explant culture. Lung cultures treated with exogenous FGF10 showed greater branching and higher levels of mSpry2 mRNA. Conversely, Fgf10 antisense oligonucleotides reduced branching and decreased mSpry2 mRNA levels. However, treatment with exogenous FGF10 or antisense Fgf10 did not change Shh and FgfR2 mRNA levels in the lungs. We investigated Sprouty2 function during lung development by two different but complementary approaches. The targeted overexpression of mSprouty2 in the peripheral lung epithelium in vivo, using the Surfactant Protein C promoter, resulted in a low level of branching, lung lobe edges abnormal in appearance and the inhibition of epithelial proliferation. Transient high-level overexpression of mSpry2 throughout the pulmonary epithelium by intra-tracheal adenovirus microinjection also resulted in a low level of branching. These results indicate for the first time that mSPROUTY2 functions as a negative regulator of embryonic lung morphogenesis and growth.