To assess retinoic acid receptor (RAR) function in alveolarization and respiratory epithelial cell differentiation/proliferation, doxycycline (Dox)-regulatable double-transgenic mouse lines were established, in which the dominant negative RARalpha was overexpressed under the control of the human surfactant protein-C 3.7-kb promoter or the rat Clara cell secretory protein 2.3-kb promoter. Overexpression of dominant negative RARalpha was induced by Dox in neonatal lungs from d 1-21 after birth, a critical period for alveolar maturation. This led to substantial alveolar abnormality with increased air space, larger but fewer alveoli, and the diminished alveolar surface area. In these animals, numbers of alveolar epithelial cells were significantly reduced upon Dox treatment. Expression of an RAR downstream target surfactant protein B gene, which is critical for maintaining the surfactant structure, was inhibited upon Dox treatment in alveolar type II epithelial cells. This finding supports a concept that endocrine molecule retinoic acid, and its receptor RARs play a critical role in alveolarization during the neonatal period of the lung.