Transforming growth factor (TGF)-β mediates hypoxia-induced inhibition of alveolar development in the newborn lung. TGF-β is regulated primarily at the level of activation of latent TGF-β. Fibroblasts expressing Thy-1 (CD90) inhibit TGF-β activation. We hypothesized that loss of Thy-1 due to hypoxia may be a mechanism by which hypoxia increases TGF-β activation and that animals deficient in Thy-1 will simulate the effects of hypoxia on lung development. To determine if loss of Thy-1 occurred during hypoxia, non-transgenic (C57BL/6) wild-type (WT) mice exposed to hypoxia were evaluated for Thy-1 mRNA and protein. To determine if Thy-1 deficiency simulated hypoxia, WT and Thy-1 null (Thy-1-/-) mice were exposed to air or hypoxia from birth to 2 wk, the critical period of lung development, and lung histology, function, parameters related to TGF-β signaling, and extracellular matrix protein content were measured. To test if the phenotype in Thy-1-/- mice was due to excessive TGF-β signaling, measurements were also performed in Thy-1-/- mice administered TGF-β neutralizing antibody (1D11). We observed that hypoxia reduced Thy-1 mRNA and Thy-1 staining in WT mice. Thy-1-/- mice had impaired alveolarization, increased TGF-β signaling, reduced lung epithelial and endothelial cell proliferation but increased fibroblast proliferation, and increased collagen and elastin. Lung compliance was lower, and tissue but not airway resistance was higher in Thy-1-/- mice at 2 wk. Thy-1-/- mice given 1D11 had improved alveolar development and lung function. These data support the hypothesis that hypoxia, by reducing Thy-1, increases TGF-β activation, and thereby inhibits normal alveolar development. Copyright © 2009 the American Physiological Society.