Binding sites for transcription factor nuclear factor one (NFI) proteins, encoded by four genes in the mouse, have been characterized from many tissue-specific genes. NFI genes are expressed in unique but overlapping patterns in embryonic and in adult tissues. Nfib is highly expressed in the embryonic lung. Here we show that Nfib null mutants die early postnatally and display severe lung hypoplasia. Heterozygotes do survive, but exhibit delayed pulmonary differentiation. Expression of transforming growth factor beta 1 (TGF-beta1) and sonic hedgehog (Shh) is not down-regulated in mutant lung epithelium at late stages of morphogenesis, which may result in incomplete lung maturation. Our study demonstrates that Nfib is essential for normal lung development, and suggests that it could be involved in the pathogenesis of respiratory distress syndromes in humans.