Fgf10 maintains the distal epithelial progenitor population during early lung development. Fgf10 is expressed in the distal (submesothelial) mesenchyme of the early developing lung and acts on the distal Sox9+ epithelial progenitor cells to maintain them and keep them from acquiring bronchiolar Sox2+ fate. Fgf10 directly activates β-catenin signaling in the distal epithelial progenitor cells, and induces Bmp4 and Sox9 expression. As the epithelial tube grows towards the source of Fgf10 expression, progeny from the distal epithelial progenitor cells leave the distal niche-like environment, assuming a more proximal position along the developing airway and start to express the proximal epithelial marker Sox2. A subset of Fgf10-expressing cells in the distal mesenchyme are progenitors for airway smooth muscle cells (ASMCs) and their amplification, as well as Fgf10 expression, is dependent on mesenchymal Wnt/β-catenin signaling.