Transforming growth factor-beta 1 (TGF-beta 1) influences the morphogenesis of many organs, regulating cell growth, differentiation, gene expression, extracellular matrix deposition, and angiogenesis. In order to assess the effects of TGF-beta 1 on lung development in vivo, transgenic mice were generated bearing a chimeric gene composed of human surfactant protein C (SP-C) gene promoter and the porcine TGF-beta 1 cDNA mutated to ensure constitutive activation of the TGF-beta 1 peptide. Because of the perinatal loss related to the SP-C-TGF-beta 1 transgene, embryos bearing the transgene were obtained on Days 16 and 18.5 of gestation. TGF-beta 1 was selectively expressed in respiratory epithelial cells of the transgenic embryos. Body weight, length, and lung size were not altered in the transgenic embryos; however, lung morphogenesis of Day 18.5 transgenic mice was arrested in a late pseudoglandular stage of development, while that of their nontransgenic littermates was typical of the saccular stage. Lungs of transgenic mice on Day 16 contained fewer acinar buds than those of nontransgenic littermates. At both ages, epithelial cell differentiation, assessed by the expression of Clara cell secretory protein2 and pro-SP-C, was inhibited. While collagen III deposition was not affected by the transgene, collagen I expression was persistent in terminal airways of fd 18.5 transgenic lungs. The distribution of alpha-smooth muscle actin was markedly altered, being detected in the mesenchyme surrounding the distal leading edges of epithelial tubules in the SP-C-TGF-beta 1 transgenic mice. Expression of TGF-beta 1 in the developing respiratory epithelium of transgenic mice arrested lung sacculation and epithelial cell differentiation in vivo, supporting the role of TGF-beta family members in lung morphogenesis and differentiation.