The murine Foxf1 gene, encoding a forkhead – or winged helix – transcription factor, is expressed in splanchnic mesenchyme during organogenesis. The concentration of expression to subepithelial mesenchyme suggested that Foxf1 is activated by paracrine signals from endodermal epithelia. Homozygous Foxf1-null mice die before embryonic day 10, owing to defects in extra-embryonic mesoderm, and do not provide any information about the role of Foxf1 in morphogenesis of endodermally derived organs. We show that, on CD1 genetic background, Foxf1 heterozygote perinatal mortality is around 90%. The haploinsufficiency causes a variable phenotype that includes lung immaturity and hypoplasia, fusion of right lung lobes, narrowing of esophagus and trachea, esophageal atresia and tracheo-esophageal fistula. Similar malformations are observed in mutants that are defective in the sonic hedgehog (Shh) signaling pathway, and we show that exogenous Shh activates transcription of Foxf1 in developing lung. Foxf1 mRNA is absent in the lungs, foregut and sclerotomes of Shh^−/− embryos, but persists in tissues where indian hedgehog (Ihh) is expressed. In lung organ cultures, activation of Foxf1 by Shh is counteracted by bone morphogenetic protein 4 (BMP4). Fibroblast growth factor (FGF) 10 and FGF7 both decrease Foxf1 expression and we speculate that this is mediated by transcriptional activation of epithelial Bmp4 (in the case of FGF10) and by inhibition of Shh expression for FGF7.