The innate immune response of airway epithelial cells to airborne allergens initiates the development of T cell responses that are central to allergic inflammation. Although proteinase allergens induce the expression of interleukin 25, we show here that epithelial matrix metalloproteinase 7 (MMP7) was expressed during asthma and was required for the maximum activity of interleukin 25 in promoting the differentiation of T helper type 2 cells. Allergen-challenged Mmp7^−/− mice had less airway hyper-reactivity and production of allergic inflammatory cytokines and higher expression of retinal dehydrogenase 1. Inhibition of retinal dehydrogenase 1 restored the asthma phenotype of Mmp7^−/− mice and inhibited the responses of lung regulatory T cells, whereas exogenous administration of retinoic acid attenuated the asthma phenotype. Thus, MMP7 coordinates allergic lung inflammation by activating interleukin 25 while simultaneously inhibiting retinoid-dependent development of regulatory T cells.