Morphogenesis of the mouse lung involves reciprocal interactions between the epithelial endoderm and the surrounding mesenchyme, leading to an invariant early pattern of branching that forms the basis of the respiratory tree. There is evidence that Fibroblast growth factor 10 (Fgf10) and Bone Morphogenetic Protein 4 (Bmp4), expressed in the distal mesenchyme and endoderm, respectively, play important roles in branching morphogenesis. To examine these roles in more detail, we have exploited an in vitro culture system in which isolated endoderm is incubated in Matrigel^TM substratum with Fgf-loaded beads. In addition, we have used a Bmp4^lacZ line of mice in which lacZ faithfully reports Bmp4 expression. Analysis of lung endoderm in vivo shows a dynamic pattern of Bmp4^lacZ expression during bud outgrowth, extension and branching. In vitro, Fgf10 induces both proliferation and chemotaxis of isolated endoderm, whether it is derived from the distal or proximal lung. Moreover, after 48 hours, Bmp4^lacZ expression is upregulated in the endoderm closest to the bead. Addition of 30-50 ng/ml of exogenous purified Bmp4 to the culture medium inhibits Fgf-induced budding or chemotaxis, and inhibits overall proliferation. By contrast, the Bmp-binding protein Noggin enhances Fgf-induced morphogenesis. Based on these and other results, we propose a model for the combinatorial roles of Fgf10 and Bmp4 in branching morphogenesis of the lung.