The key role played by Fgf10 during early lung development is clearly illustrated in Fgf10 knockout mice, which exhibit lung agenesis. However, Fgf10 is continuously expressed throughout lung development suggesting extended as well as additional roles for FGF10 at later stages of lung organogenesis. We previously reported that the enhancer trap Mlcv1v-nLacZ-24 transgenic mouse strain functions as a reporter for Fgf10 expression and displays decreased endogenous Fgf10 expression. In this paper, we have generated an allelic series to determine the impact of Fgf10 dosage on lung development. We report that 80% of the newborn Fgf10 hypomorphic mice die within 24 h of birth due to respiratory failure. These mutant mouse lungs display severe hypoplasia, dilation of the distal airways and large hemorrhagic areas. Epithelial differentiation and proliferation studies indicate a specific decrease in TTF1 and SP-B expressing cells correlating with reduced epithelial cell proliferation and associated with a decrease in activation of the canonical Wnt signaling in the epithelium. Analysis of vascular development shows a reduction in PECAM expression at E14.5, which is associated with a simplification of the vascular tree at E18.5. We also show a decrease in α-SMA expression in the respiratory airway suggesting defective smooth muscle cell formation. At the molecular level, these defects are associated with decrease in Vegfa and Pdgfa expression likely resulting from the decrease of the epithelial/mesenchymal ratio in the Fgf10 hypomorphic lungs. Thus, our results indicate that FGF10 plays a pivotal role in maintaining epithelial progenitor cell proliferation as well as coordinating alveolar smooth muscle cell formation and vascular development.