Alveolar nitric oxide (NO) is a measure of peripheral airway inflammation in asthma, potentially associated with disease severity. The relationship between alveolar NO and physiological tests of peripheral airway (dys)function has not been investigated. The present authors hypothesised that peripheral airway inflammation and dysfunction are inter-related and associated with asthma severity. Alveolar NO was compared between 17 patients with mild-to-moderate asthma and 14 patients with severe asthma and related to total lung capacity (TLC), residual volume (RV)/TLC, thoracic gas volume (FRC), slope of the single breath nitrogen washout curve (dN2), closing capacity (CC)/TLC and fall in forced vital capacity at the provocative concentration of methacholine causing a 20% fall in forced expiratory volume in one second. In patients with severe asthma, strong correlations were found between alveolar NO and RV/TLC % pred, FRC % pred, dN2, and CC/TLC. Patients with oral steroid-dependent asthma had higher alveolar NO levels (2.7 ppb) compared with the other patients with severe (0.6 ppb) and mild-to-moderate asthma (0.3 ppb). The present authors conclude that alveolar nitric oxide is closely related to parameters of peripheral airway dysfunction in patients with severe asthma, and that oral steroid-dependent asthmatics have more peripheral airway disease than nonsteroid-dependent asthmatics. This suggests that patients on chronic oral steroid treatment have more extensive disease and require additional anti-inflammatory treatment to better target the peripheral airways.