Normal alveolarization has been studied in rodents using detailed morphometric techniques and loss of function approaches for growth factors and their receptors. However, it remains unclear how these growth factors direct the formation of secondary septae. We have previously developed a transgenic mouse model in which expression of a soluble dominant negative FGF receptor (dnFGFR) in the prenatal period results in reduced alveolar septae formation and subsequent alveolar simplification. Retinoic acid (RA), a biologically active derivative of vitamin A, can induce regeneration of alveoli in adult rodents. In this study we demonstrate that RA induces alveolar re-septation in this transgenic mouse model and that re-alveolarization in adult mice is FGF dependent. Proliferation in the lung parenchyma, an essential pre-requisite for lung regrowth was enhanced after 14 days of RA treatment and was not influenced by dnFGFR expression. During normal lung development, formation of secondary septae is associated with the transient presence of alpha smooth muscle actin (SMA) positive interstitial myofibroblasts. One week after completion of RA treatment SMA expression was detected in interstitial fibroblasts, supporting the concept that RA initiated re-alveolarization recapitulates aspects of septation that occur during normal lung development. Expression of dnFGFR blocked re-alveolarization with increased PDGFR positive cells and decreased SMA positive cells. Taken together our data demonstrate that FGF signaling is required for the induction of SMA in the PDGFR positive myofibroblast progenitor and the progression of alveolar regeneration.