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Integrin-dependent interactions between cells and extracellular matrix regulate lung development; however, specific roles for β1-containing integrins in individual cell types, including epithelial cells, remain incompletely understood. In this study, the functional importance of β1 integrin in lung epithelium during mouse lung development was investigated by deleting the integrin from E10.5 onwards using surfactant protein C promoter-driven Cre. These mutant mice appeared normal at birth but failed to gain weight appropriately and died by 4 months of age with severe hypoxemia. Defects in airway branching morphogenesis in association with impaired epithelial cell adhesion and migration, as well as alveolarization defects and persistent macrophage-mediated inflammation were identified. Using an inducible system to delete β1 integrin after completion of airway branching, we showed that alveolarization defects, characterized by disrupted secondary septation, abnormal alveolar epithelial cell differentiation, excessive collagen I and elastin deposition, and hypercellularity of the mesenchyme occurred independently of airway branching defects. By depleting macrophages using liposomal clodronate, we found that alveolarization defects were secondary to persistent alveolar inflammation. β1 integrin-deficient alveolar epithelial cells produced excessive monocyte chemoattractant protein 1 and reactive oxygen species, suggesting a direct role for β1 integrin in regulating alveolar homeostasis. Taken together, these studies define distinct functions of epithelial β1 integrin during both early and late lung development that affect airway branching morphogenesis, epithelial cell differentiation, alveolar septation and regulation of alveolar homeostasis.