Embryonic stem (ES) cell pluripotency is being investigated increasingly to obtain specific cell lineages for tissue engineering. However, the possibility that ES cells can give rise to lung tissue has not been tested. We hypothesized that lung epithelial cells (type II pneumocytes) can be derived in vitro from murine ES cells. After withdrawal of leukemia inhibitory factor (LIF) and formation of embryoid bodies in maintenance medium for 10, 20, and 30 days, differentiating ES cells were kept in the same medium or transferred to serum-free small airway growth medium (SAGM) for a further 3 or 14 days of culture. The presence of type II pneumocytes in the resulting mixed cultures was demonstrated by reverse transcriptase-polymerase chain reaction (RT-PCR) of surfactant protein C (SPC) mRNA, immunostaining of SPC, and electron microscopy of osmiophilic lamellar bodies only at 30 days sampling time. SAGM appeared to be more favorable for type II cell formation than ES medium. No SPC transcripts were found in differentiating cells grown under the same conditions without formation of embryoid bodies. These findings could form the basis for the enrichment of ES cell-derived cultures with type II pneumocytes, and provide an in vitro system for investigating mechanisms of lung repair and regeneration.