Lung surfactant is a lipid-protein-film covering the inner alveolar surface. We have previously shown that double knock-out (d-ko) mice lacking both the epidermal-type (E-) and the heart-type (H-) fatty acid binding protein (FABP) exhibit a defect of surfactant synthesis in alveolar type II cells that can be corrected by feeding pioglitazone, a drug that activates peroxisome proliferator-activated receptor gamma (PPARgamma). Here, we demonstrate first that healthy surfactant at collapse pressure produces protrusions composed of bilayers but not folds, second that the d-ko effect profoundly perturbs lipid/hydrophobic protein composition, pressure-area isotherm, and structural organisation of the surfactant at nanoscale, parameters that are critical for the normal breathing cycle. In support of these data in vivo measurements of lung function reveal that maximum compliance in d-ko vs. wild-type mice is significantly reduced. Further, we show that the biophysical phenotype can be corrected substantially with pioglitazone. Finally, we show that d-ko alveolar cells up-regulate liver-type (L-) FABP, a member of the FABP family that we have previously shown to interact with PPARgamma. Taken together, these data suggest that PPARgamma agonists could be a tool to repair surfactant damage caused by dysfunctional alveolar lipid metabolism, and provide in vivo support for L-FABP aided signaling.