Latent transforming growth factor (TGF)-beta binding proteins (LTBPs) modulate the secretion and activation of latent TGF-beta. To explore LTBP function in vivo, we created an Ltbp-3(-/-) mouse that has developmental emphysema with decreased septation in terminal alveoli. Differences in distal airspace enlargement were obvious at day 6 after birth. Secondary septation was inhibited, so by days 21 to 28 the mean linear intercept was approximately twofold greater in mutant versus control lungs. There were no differences in lung collagen and elastin, visualized by immunohistochemistry, or in myofibroblast numbers, determined by alpha-smooth muscle actin-positive cells, between mutant or wild-type lungs as the animals aged, other than differences associated with altered lung structure in mutant animals. However, from day 10 there was twice the number of alveolar type II cells in mutant alveoli compared to controls. At days 6 and 10, a transient enhancement in cell proliferation in the mutant lungs was observed by both 5-bromo-2'-deoxy-uridine and proliferating cell nuclear antigen labeling, accompanied by enhanced numbers of terminal dUTP nick-end labeling-positive cells at days 4, 6, and 10. Finally, there was a transient decrease in TGF-beta signaling at days 4 to 6 in Ltbp-3(-/-) lungs. These results indicate that in the absence of Ltbp-3, a temporary decrease in TGF-beta signaling in the lungs at days 4 to 6 alters cell proliferation, correlating with inhibition of septation and developmental emphysema.