An activated form of β-catenin [Catnb^Δ(ex3)] was expressed in respiratory epithelial cells of the developing lung. Although morphogenesis was not altered at birth, air space enlargement and epithelial cell dysplasia were observed in the early postnatal period and persisted into adulthood. The Catnb^Δ(ex3) protein caused squamous, cuboidal, and goblet cell dysplasia in intrapulmonary conducting airways. Atypical epithelial cells that stained for surfactant pro protein C (pro-SP-C) and had morphological characteristics of alveolar type II cells were observed in bronchioles of the transgenic mice. Catnb^Δ(ex3) inhibited expression of Foxa2 and caused goblet cell hyperplasia associated with increased staining for mucins and the MUC5A/C protein. In vitro, both wild type and activated β-catenin negatively regulated the expression of the Foxa2 promoter. Catnb^Δ(ex3) also caused pulmonary tumors in adult mice. Activation of β-catenin caused ectopic differentiation of alveolar type II-like cells in conducting airways, goblet cell hyperplasia, and air space enlargement, demonstrating a critical role for the Wnt/β-catenin signal transduction pathway in the differentiation of the respiratory epithelium in the postnatal lung.