Herein, we show that the paired-related homeobox gene, Prx1, is required for lung vascularization. Initial studies revealed that Prx1 localizes to differentiating endothelial cells (ECs) within the fetal lung mesenchyme, and later within ECs forming vascular networks. To begin to determine whether Prx1 promotes EC differentiation, fetal lung mesodermal cells were transfected with full-length Prx1 cDNA, resulting in their morphological transformation to an endothelial-like phenotype. In addition, Prx1-transformed cells acquired the ability to form vascular networks on Matrigel. Thus, Prx1 might function by promoting pulmonary EC differentiation within the fetal lung mesoderm, as well as their subsequent incorporation into vascular networks. To understand how Prx1 participates in network formation, we focused on tenascin-C (TN-C), an extracellular matrix (ECM) protein induced by Prx1. Immunocytochemistry/ histochemistry showed that a TN-C–rich ECM surrounds Prx1-positive pulmonary vascular networks both in vivo and in tissue culture. Furthermore, antibody-blocking studies showed that TN-C is required for Prx1-dependent vascular network formation on Matrigel. Finally, to determine whether these results were relevant in vivo, we examined newborn Prx1–wild-type (+/+) and Prx1-null (−/ −) mice and showed that Prx1 is critical for expression of TN-C and lung vascularization. These studies provide a framework to understand how Prx1 controls EC differentiation and their subsequent incorporation into functional pulmonary vascular networks.