Tissue inhibitors of metalloproteinases (TIMPs) regulate extracellular matrix (ECM) degradation by matrix metalloproteinases (MMPs) throughout embryogenesis. We examined lungs from TIMP3 null mice and found decreased bronchiole branching, enhanced activity of MMPs and enhanced fibronectin degradation throughout lung development compared to controls. Activation of focal adhesion kinase (FAK) was also reduced from embryonic days 12.5 through 14.5 in TIMP3 null lungs. Treatment with a synthetic MMP inhibitor, GM6001, in utero enhanced the branching pattern in both wild type and null lungs accompanied by a restoration of fibronectin localization, signaling through FAK and epithelial cell proliferation in null lungs. Direct down-regulation of FAK abundance in WT lung organ culture by siRNA targeting resulted in reduced bronchiole branching, phenocopying the TIMP3 defect. We propose that enhanced MMP activity in the absence of TIMP3 interferes with focal ECM proteolysis, perturbing the intracellular signaling necessary for correct pattern formation of the bronchiole tree during bronchiole branching morphogenesis. Thus, TIMP3 can indirectly regulate epithelial cell proliferation via MMP inhibitory activity. While others have demonstrated this function for MMPs, and there is in vitro evidence that TIMP3 controls proliferation, to our knowledge this is the first evidence of TIMP3 regulating proliferation in vivo.