Although respiratory tract defects that result from disruption of retinoic acid (RA) signaling have been widely reported, the mechanism by which endogenous RA regulates early lung morphogenesis is unknown. Here, we provide novel evidence that a major role for RA is to selectively maintain mesodermal proliferation and induce fibroblast growth factor 10 (Fgf10) expression in the foregut region where the lung forms. By using a pan-RAR antagonist (BMS493) in foregut explant cultures, we show that bud initiation is selectively blocked in the prospective respiratory region by failure to induce Fgf10 in the corresponding mesoderm. The RA regulation of Fgf10 expression occurs only in this region, within a defined developmental window, and is not seen in other foregut derivatives such as thyroid and pancreas where Fgf10 is also required for normal development. Furthermore, we show that RA activity is essential in the lung field to maintain lung cell identity in the endoderm; RAR antagonism disrupts expression of thyroid transcription factor 1 (Ttf1), an early marker of the respiratory region in the endoderm, and surfactant protein C (Sp-C) mRNAs. Our observations in mouse foregut cultures are corroborated by data from an in vivo model of vitamin A deficiency in rats. Our study supports RA as an essential regulator of gene expression and cellular activities during primary bud formation.