Background Alveolar septation marks the beginning of the transition from the saccular to alveolar stage of lung development. Inflammation can disrupt this process and permanently impair alveolar formation resulting in alveolar hypoplasia as seen in bronchopulmonary dysplasia in preterm newborns. NF-κB is a transcription factor central to multiple inflammatory and developmental pathways including dorsal-ventral patterning in fruit flies; limb, mammary and submandibular gland development in mice; and branching morphogenesis in chick lungs. We have previously shown that epithelial overexpression of NF-κB accelerates lung maturity using transgenic mice. The purpose of this study was to test our hypothesis that targeted deletion of NF-κB signaling in lung epithelium would impair alveolar formation. Methods We generated double transgenic mice with lung epithelium-specific deletion of IKKβ, a known activating kinase upstream of NF-κB, using a cre-loxP transgenic recombination strategy. Lungs of resulting progeny were analyzed at embryonic and early postnatal stages to determine specific effects on lung histology, and mRNA and protein expression of relevant lung morphoreulatory genes. Lastly, results measuring expression of the angiogenic factor, VEGF, were confirmed in vitro using a siRNA-knockdown strategy in cultured mouse lung epithelial cells. Results Our results showed that IKKβ deletion in the lung epithelium transiently decreased alveolar type I and type II cells and myofibroblasts and delayed alveolar formation. These effects were mediated through increased alveolar type II cell apoptosis and decreased epithelial VEGF expression. Conclusions These results suggest that epithelial NF-κB plays a critical role in early alveolar development possibly through regulation of VEGF.