Glucocorticoid signalling is essential for lung maturation where they stimulate alveolar cell differentiation, changes in lung structure, reabsorption of lung liquid and lung surfactant production. Although synthetic glucocorticoids are used to improve lung maturation in very preterm babies, their molecular and cellular mechanisms of action are poorly understood. Deletion of the glucocorticoid receptor (GR) gene by gene targeting in all cells of the mouse causes retarded lung development and perinatal death. To investigate the critical cells and compartments for glucocorticoid activity in the developing lung we have used the Cre recombinase/loxP recombination system to delete the GR gene in lung epithelial cells (an inducible SPC-Cre), mesenchymal fibroblasts (Dermo-1 Cre) and endothelial cells (Tie-2 Cre). The viability of GR/Tie-2-Cre and GR/SPC-Cre mice at birth was not affected, but in contrast only 6% of GR/Dermo-1-Cre mice survived birth. Deletion of the GR was confirmed using immunostaining with a GR-specific antibody Histological analysis of GR/Dermo-1-Cre mice showed a condensed lung phenotype and an increased tissue to airspace ratio, similar to a total-GR-null mouse. Finally, immunostaining with KI67 at E18.5 showed greatly increased numbers of proliferating mesenchymal cells in mesenchyme-GR null mice. These results clearly show that glucocorticoids have an essential mesenchymal role in the developing lung to promote appropriate lung maturation prior to birth, whereas action in epithelial cells are not critical during the perinatal period.