Estrogens have well-documented effects on lung development and physiology. However, the classical estrogen receptor alpha (ERalpha) is undetectable in the lung, and this has left many unanswered questions about the mechanism of estrogen action in this organ. Here we show, both in vivo and in vitro, that ERbeta is abundantly expressed and biologically active in the lung. Comparisons of lungs from wild-type mice and mice with an inactivated ERbeta gene (ERbeta(-/-)) revealed decreased numbers of alveoli in adult female ERbeta(-/-) mice and findings suggesting deficient alveolar formation as well as evidence of surfactant accumulation. Platelet-derived growth factor A (PDGF-A) and granulocyte-macrophage colony-stimulating factor (GM-CSF), key regulators of alveolar formation and surfactant homeostasis, respectively, were decreased in lungs of adult female ERbeta(-/-) mice, and direct transcriptional regulation of these genes by ERbeta was demonstrated. This suggests that estrogens act via ERbeta in the lung to modify PDGF-A and GM-CSF expression. These results provide a potential molecular mechanism for the gender differences in alveolar structure observed in the adult lung and establish ERbeta as a previously unknown regulator of postnatal lung development and homeostasis.