Serine/threonine protein phosphatases (PP2A & PP2B), are key signal transduction intermediates in the regulation of cellular proliferation and differentiation. As the roles of PP2A and PP2B in the regulation of lung development are unknown, we studied the effect of PP2A and PP2B inhibition on new airway formation and morphologic development in whole organ explant cultures of embryonic (E14) rat lung. Microdissected lung primordia were cultured in media containing one of either two PP2A inhibitors, okadaic acid(OA) (0-9 nM) or cantharidin (CAN)(0-3600 nM), or the PP2B inhibitor deltamethrin (DEL) (0-10 uM). The highest concentration of compound in each treatment group = ≈100X IC50 of PP2A or PP2B. Individual explants were photographed daily to determine new airway formation by counting new airway branching. 9 nM OA and 3600 nM CAN treated explants demonstrated a significant decrease in new airway formation at both 24 and 48 hours. New airway formation was decreased by 37.3% and 42.4% at 24 and 48 hours respectively in the 9 nM OA treated explants and by 50.4% and 50.0% at 24 and 48 hours in the 3600 nM CAN treated explants. PP2B inhibition with DEL did not affect new airway development. Histologic examinations of representative explants from all treatment groups were made by light microscopy after H&E staining. OA and CAN treated explants demonstrated a striking dose dependent loss of mesenchymal organization and structure as evidenced by mesenchymal cell death and a failure of mesenchymal cell apposition to the developing respiratory epithelium. In contrast, the differentiated respiratory epithelium demonstrated continued growth and proliferation by the presence of mitotic figures at even the highest concentrations of PP2A inhibitors and by the continued increase in airway branching in all groups throughout the study period. These findings indicate that PP2A inhibition decreases but does not arrest respiratory epithelial cell proliferation and demonstrate a specific inhibitory effect on mesenchymal cell populations. PP2B inhibition, on the other hand, had no effect on explant growth or morphology. We speculate that PP2A may play a significant role in the mesenchymal-epithelial cell interactions necessary for normal growth and differentiation.