Retinoic acid (RA) is an embryonic signaling molecule regulating a wide array of target genes, thereby being a master regulator of patterning and differentiation in a variety of organs. Here we show that mouse embryos deficient for the RA-synthesizing enzyme retinaldehyde dehydrogenase 2 (RALDH2), if rescued from early lethality by maternal RA supplementation between E7.5 and E8.5, lack active RA signaling in the foregut region. The resulting mutants completely fail to develop lungs. Development of more posterior foregut derivatives (stomach and duodenum), as well as liver growth, is also severely affected. A primary lung bud is specified in the RA-deficient embryos, which fails to outgrow due to defective FGF10 signaling and lack of activation of FGF-target genes, such as Pea3 and Bmp4 in the epithelium. Specific Hox and Tbx genes may mediate these RA regulatory effects. Development of foregut derivatives can be partly restored in mutants by extending the RA supplementation until at least E10.5, but lung growth and branching remain defective and a hypoplastic lung develops on the right side only. Such conditions poorly restore FGF10 signaling in the lung buds. Explant culture of RALDH2-deficient foreguts show a capacity to undergo lung budding and early branching in the presence of RA or FGF10. Our data implicate RA as a regulator of gene expression in the early embryonic lung and stomach region upstream of Hox, Tbx and FGF10 signaling.