cAMP signaling is postulated to play a role in distal lung epithelial differentiation based on several observations. First, it enhances fibroblast growth factor-induced transdifferentiation of early tracheal epithelium into respiratory epithelium. Second, there are cAMP-responsive elements in the heterologous promoters of Sftpb and Sftpa genes. Third, cAMP augments the effect of dexamethasone in maintaining differentiation of human fetal type II pneumocyte culture. However, this concept has not been thoroughly tested in vivo. In the current study, we modulated cAMP signaling in developing distal lung epithelium in vivo using an inducible transgenic system that expressed a mutant form of Galpha(s) (Galpha(s)Q227L). We failed to demonstrate the ability of cAMP to promote distal epithelial maturation during embryonic stages. The results argue against its physiological role in this process. In addition, induction of cAMP signaling at the late pseudoglandular stage but not during the canalicular or saccular stage surprisingly delayed distal differentiation by suppressing the expression of Sftpc, Sftpa, and Aquaporin5 as well as the formation of lamellar bodies. This stage-specific inhibitory effect was observed in the absence of cellular toxicity or changes in branching. Transgenic lungs did not show significant changes in the known pathways that are important for distal differentiation. Therefore, we propose the existence of yet-to-be identified cAMP-sensitive novel regulators of early distal lung epithelial differentiation. Although the delay of differentiation seemed to be reversible at later stages, it still led to pronounced permanent postnatal airspace enlargement due to impaired paracrine function of distal epithelium in regulating alveolar myofibroblast development.