Bronchopulmonary dysplasia (BPD) is a frequent complication of preterm birth. This chronic lung disease results from arrested saccular airway development and is most common in infants exposed to inflammatory stimuli. In experimental models, inflammation inhibits expression of fibroblast growth factor-10 (FGF-10) and impairs epithelial-mesenchymal interactions during lung development; however, the mechanisms connecting inflammatory signaling with reduced growth factor expression are not yet understood. In this study we found that soluble inflammatory mediators present in tracheal fluid from preterm infants can prevent saccular airway branching. In addition, LPS treatment led to local production of mediators that inhibited airway branching and FGF-10 expression in LPS-resistant C.C3-Tlr4(Lpsd)/J fetal mouse lung explants. Both direct NF-κB activation and inflammatory cytokines (IL-1β and TNF-α) that activate NF-κB reduced FGF-10 expression, whereas chemokines that signal via other inflammatory pathways had no effect. Mutational analysis of the FGF-10 promoter failed to identify genetic elements required for direct NF-κB-mediated FGF-10 inhibition. Instead, NF-κB activation appeared to interfere with the normal stimulation of FGF-10 expression by Sp1. Chromatin immunoprecipitation and nuclear coimmunoprecipitation studies demonstrated that the RelA subunit of NF-κB and Sp1 physically interact at the FGF-10 promoter. These findings indicate that inflammatory signaling through NF-κB disrupts the normal expression of FGF-10 in fetal lung mesenchyme by interfering with the transcriptional machinery critical for lung morphogenesis.