DICER is a key enzyme that processes microRNA and small interfering RNA precursors into their short mature forms, enabling them to regulate gene expression. Only a single Dicer gene exists in the mouse genome, and it is broadly expressed in developing tissues. Dicer-null mutants die before gastrulation. Therefore, to study Dicer function in the later event of lung formation, we inactivated it in the mouse lung epithelium using a Dicer conditional allele and the Sonic Hedgehogcre (Shhcre) allele. Branching arrests in these mutant lungs, although epithelial growth continues in distal domains that are expanded compared with normal samples. These defects result in a few large epithelial pouches in the mutant lung instead of numerous fine branches present in a normal lung. Significantly, the initial phenotypes are apparent before an increase in epithelial cell death is observed, leading us to propose that Dicer plays a specific role in regulating lung epithelial morphogenesis independent of its requirement in cell survival. In addition, we found that the expression of Fgf10, a key gene involved in lung development, is up-regulated and expanded in the mesenchyme of Dicer mutant lungs. Previous studies support the hypothesis that precise localization of FGF10 in discrete sites of the lung mesenchyme serves as a chemoattractant for the outgrowth of epithelial branches. The aberrant Fgf10 expression may contribute to the Dicer morphological defects. However, the mechanism by which DICER functions in the epithelium to influence Fgf10 expression in the mesenchyme remains unknown.