Membrane type 1-matrix metalloprotease (MT1-MMP or MMP-14) is a major activator of pro-MMP-2 and is essential for skeletal development. We show here that it is required for branching morphogenesis of the submandibular gland but not the lung. Instead, in the lung, it is essential for postnatal development of alveolar septae. Lung development in Mmp14-/- mice is arrested at the prealveolar stage with compensatory hyperinflation of immature saccules. Mmp2-/- mice lacked comparable defects in the lung and submandibular gland, suggesting that MT1-MMP acts via mechanisms independent of pro-MMP-2 activation. Since the developmental defects in the lung are first manifest around the time of initial vascularization (E16.5), we investigated the behavior of pulmonary endothelial cells from Mmp14+/+ and Mmp14-/- mice. Endothelial cells from lungs of 1-week-old Mmp14-/- mice show reduced migration and formation of three-dimensional structures on Matrigel. Since pulmonary septal development requires capillary growth, the underlying mechanism of pulmonary hypoplasia in Mmp14-/- mice may be defective angiogenesis, supporting a model in which angiogenesis is a critical rate-limiting step for acquisition of pulmonary parenchymal mass.