Disruption of retinoic acid (RA) signaling during early development results in severe respiratory tract abnormalities, including lung agenesis. Previous studies suggest that this might result from failure to selectively induce fibroblast growth factor 10 (Fgf10) in the prospective lung region of the foregut. Little is known about the RA-dependent pathways present in the foregut that may be crucial for lung formation. By performing global gene expression analysis of RA-deficient foreguts from a genetic [retinaldehyde dehydrogenase 2 (Raldh2)-null] and a pharmacological (BMS493-treated)mouse model, we found upregulation of a large number of Tgfβ targets. Increased Smad2 phosphorylation further suggested that Tgfβ signaling was hyperactive in these foreguts when lung agenesis was observed. RA rescue of the lung phenotype was associated with low levels of Smad2 phosphorylation and downregulation of Tgfβ targets in Raldh2-null foreguts. Interestingly, the lung defect that resulted from RA-deficiency could be reproduced in RA-sufficient foreguts by hyperactivating Tgfβ signaling with exogenous TGFβ1. Preventing activation of endogenous Tgfβsignaling with a pan-specific TGFβ-blocking antibody allowed bud formation and gene expression in the lung field of both Raldh2-null and BMS493-treated foreguts. Our data support a novel mechanism of RA-Tgfβ-Fgf10 interactions in the developing foregut, in which endogenous RA controls Tgfβ activity in the prospective lung field to allow local expression of Fgf10 and induction of lung buds.