Perinatal inflammation and the inflammatory cytokine IL-1 can modify lung morphogenesis. To examine the effects of antenatal expression of IL-1β in the distal airway epithelium on fetal lung morphogenesis, we studied lung development and surfactant expression in fetal mice expressing human IL-1β under the control of the surfactant protein (SP)-C promoter. IL-1β-expressing pups suffered respiratory failure and died shortly after birth. IL-1β caused fetal lung inflammation and enhanced the expression of keratinocyte-derived chemokine (KC/CXCL1) and monocyte chemoattractant protein 3 (MCP-3/CCL7), the calgranulins S100A8 and S100A9, the acute-phase protein serum amyloid A3 (SAA3), the chitinase-like proteins Ym1 and Ym2, and pendrin. IL-1β decreased the percentage of the total distal lung area made up of air saccules and the number of air saccules in the lungs of fetal mice. IL-1β inhibited the expression of VEGF-A and of its receptors VEGFR-1 and VEGFR-2. The percentage of the cellular area of the distal lung made up of capillaries was decreased in IL-1β-expressing fetal mice. IL-1β suppressed the production of SP-B and pro-SP-C, and decreased the amount of phosphatidylcholine and the percentage of palmitic acid in the phosphatidylcholine fraction of lung phospholipids, indicating that IL-1β prevented the differentiation of type II epithelial cells. The production of Clara cell secretory protein (CCSP) in the nonciliated bronchiolar (Clara) cells was likewise suppressed by IL-1β. In conclusion, expression of IL-1β in the epithelium of the distal airways disrupted the development of the airspaces and capillaries in the fetal lung and caused fatal respiratory failure at birth.