During lung development, signaling by Fgf10 (fibroblast growth factor 10) and its receptor Fgfr2b is critical for induction of a gene network that controls proliferation, differentiation, and branching of the epithelial tubules. The downstream events triggered by Fgf10-Fgfr2b signaling during this process are still poorly understood. In a global screen for transcriptional targets of Fgf10, we identified Ctsh (cathepsin H), a gene encoding a lysosomal cysteine protease of the papain family, highly up-regulated in the developing lung epithelium. Here we show that among other cathepsin genes present in the lung, Ctsh is the only family member selectively induced by Fgf10 in the lung epithelium. We provide evidence that, during branching morphogenesis, epithelial expression of Ctsh overlaps temporally and spatially with that of Bmp4 (bone morphogenetic protein 4), another target of Fgf10. Moreover, we show that Ctsh controls the availability of mature Bmp4 protein in the embryonic lung and that inhibiting Ctsh activity leads to a marked accumulation of Bmp4 protein and disruption of branching morphogenesis. Tightly controlled levels of Bmp4 signaling are critical for patterning of the distal lung epithelium. Our study suggests a potentially novel posttranscriptional mechanism in which Ctsh rapidly removes Bmp4 from forming buds to limit Bmp4 action. The presence of both Ctsh and Bmp4 or Bmp4 signaling activity in other developing structures, such as the kidney, yolk sac, and choroid plexus, suggests a possible general role of Ctsh in regulating Bmp4 proteolysis in different morphogenetic events.Lung organogenesis starts in the mouse at around embryonic day 9.5 (E9.5), 2 when primary buds emerge from the ventrolateral aspect of the foregut endoderm. At E10.5, secondary buds start to form, and from then on the epithelial tubules undergo a series of patterning events that includes budding, clefting, and dichotomous branching to generate the airways and the alveoli. Genetic analysis has implicated a number of signaling molecules, present in the epithelial and mesenchymal layers of growing buds, in controlling cell survival, proliferation, and fate determination during this process. The mechanisms by which expression of these molecules are regulated are complex and include dynamic induction and spatial restriction of expression and negative feedback suppression (reviewed in Ref. 1).Fibroblast growth factor 10 (Fgf10) is essential for lung formation. No lungs are formed in genetically modified mice in which Fgf10 or its receptor Fgfr2b has been deleted (2-4). Fgf10 is dynamically expressed in the mesenchyme at the presumptive sites of budding. Fgf10 binds to Fgfr2b in the epithelium and activates an intracellular signaling cascade, which leads to the migration and proliferation of lung epithelial progenitor cells in emerging buds (2, 5). The downstream events triggered by Fgf10-Fgfr2b signaling that are essential for lung branching morphogenesis are still poorly understood. In the process of screening for transcriptional ...