Bronchopulmonary dysplasia (BPD), a chronic lung disease of prematurity, has been linked to endoplasmic reticulum (ER) stress. To investigate a causal role for ER stress in BPD pathogenesis, we generated conditional knockout (KO) mice (cGrp78f/f) with lung epithelial cell-specific KO of Grp78, a gene encoding the ER chaperone 78-kD glucose-regulated protein (GRP78), a master regulator of ER homeostasis and the unfolded protein response (UPR). Lung epithelial-specific Grp78 KO disrupted lung morphogenesis, causing developmental arrest, increased alveolar epithelial type II cell apoptosis, and decreased surfactant protein and type I cell marker expression in perinatal lungs. cGrp78f/f pups died immediately after birth, likely owing to respiratory distress. Importantly, Grp78 KO triggered UPR activation with marked induction of the proapoptotic transcription factor CCAAT/enhancer-binding proteins (C/EBP) homologous protein (CHOP). Increased expression of genes involved in oxidative stress and cell death and decreased expression of genes encoding antioxidant enzymes suggest a role for oxidative stress in alveolar epithelial cell (AEC) apoptosis. Increased Smad3 phosphorylation and expression of transforming growth factor-β/Smad3 targets Cdkn1a (encoding p21) and Gadd45a suggest that interactions among the apoptotic arm of the UPR, oxidative stress, and transforming growth factor-β/Smad signaling pathways contribute to Grp78 KO-induced AEC apoptosis and developmental arrest. Chemical chaperone Tauroursodeoxycholic acid reduced UPR activation and apoptosis in cGrp78f/f lungs cultured ex vivo, confirming a role for ER stress in observed AEC abnormalities. These results demonstrate a key role for GRP78 in AEC survival and gene expression during lung development through modulation of ER stress, and suggest the UPR as a potential therapeutic target in BPD.