Pulmonary inflammation and increased production of the inflammatory cytokine IL-1β are associated with the development of bronchopulmonary dysplasia (BPD) in premature infants. To study the actions of IL-1β in the fetal and newborn lung in vivo, we developed a bitransgenic mouse in which IL-1β is expressed under conditional control in airway epithelial cells. Perinatal pulmonary expression of IL-1β caused respiratory insufficiency that was associated with increased postnatal mortality. While intrauterine growth of IL-1β–expressing mice was normal, their postnatal growth was impaired. IL-1β disrupted alveolar septation and caused abnormalities in α-smooth muscle actin and elastin deposition in the septa of distal airspaces. IL-1β disturbed capillary development and inhibited the production of vascular endothelial growth factor in the lungs of infant mice. IL-1β induced the expression of CXC chemokines KC (CXCL1) and macrophage inflammatory protein-2 (CXCL2) and of CC chemokines monocyte chemotactic protein (MCP)-1 (CCL2) and MCP-3 (CCL7), consistent with neutrophilic and monocytic infiltration of the lungs. IL-1β caused goblet cell metaplasia and bronchial smooth muscle hyperplasia. Perinatal expression of IL-1β in epithelial cells of the lung caused a lung disease that was clinically and histologically similar to BPD.