Transforming growth factor (TGF)-beta signalling plays important roles in regulating lung development. However, the specific regulatory functions of TGF-beta signalling in developing lung epithelial versus mesenchymal cells are still unknown. By immunostaining, the expression pattern of the TGF-beta type II receptor (TbetaRII) was first determined in the developing mouse lung. The functions of TbetaRII in developing lung were then determined by conditionally knocking out TbetaRII in the lung epithelium of floxed-TbetaRII/surfactant protein C-reverse tetracycline transactivator/TetO-Cre mice versus mesenchyme of floxed-TbetaRII/Dermo1-Cre mice. TbetaRII was expressed only in distal airway epithelium at early gestation (embryonic day (E)11.5), but in both airway epithelium and mesenchyme from mid-gestation (E14.5) to post-natal day 14. Abrogation of TbetaRII in mouse lung epithelium resulted in retardation of post-natal lung alveolarisation, with markedly decreased type I alveolar epithelial cells, while no abnormality in prenatal lung development was observed. In contrast, blockade of TbetaRII in mesoderm-derived tissues, including lung mesenchyme, resulted in mildly abnormal lung branching and reduced cell proliferation after mid-gestation, accompanied by multiple defects in other organs, including diaphragmatic hernia. The primary lung branching defect was verified in embryonic lung explant culture. The novel findings of the present study suggest that transforming growth factor-beta type II receptor-mediated transforming growth factor-beta signalling plays distinct roles in lung epithelium versus mesenchyme to differentially control specific stages of lung development.