In preterm infants, soluble inflammatory mediators target lung mesenchymal cells, disrupting airway and alveolar morphogenesis. However, how mesenchymal cells respond directly to microbial stimuli remains poorly characterized. Our objective was to measure the genome-wide innate immune response in fetal lung mesenchymal cells exposed to the bacterial endotoxin lipopolysaccharide (LPS). Using Affymetrix MoGene 1.0st arrays, we showed that LPS induced expression of unique innate immune transcripts heavily weighted toward CC and CXC family chemokines. The transcriptional response was different between cells from E11, E15, and E18 mouse lungs. In all cells tested, LPS inhibited expression of a small core group of genes including the VEGF receptor Vegfr2. While best characterized in vascular endothelial populations, we demonstrated here that fetal mouse lung mesenchymal cells express Vegfr2 and respond to VEGF-A stimulation. In mesenchymal cells, VEGF-A increased cell migration, activated the ERK/AKT pathway, and promoted FOXO3A nuclear exclusion. Using an experimental co-culture model of epithelial-mesenchymal interactions, we also showed that VEGFR2 inhibition prevented formation of 3-dimensional structures. Both LPS and tyrosine kinase inhibition reduced 3-dimensional structure formation. Our data suggest a novel mechanism for inflammation-mediated defects in lung development involving reduced VEGF signaling in lung mesenchyme.