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Background: Bronchopulmonary dysplasia (BPD) is a lung disease of preterm born infants, characterized by alveolar simplification. MicroRNA (miR) are known to be involved in many biological and pathological processes in the lung. Although a changed expression has been described for several miR in BPD, a causal role remains to be established. Results: Our results showed that the expression level of miR-154 increases during lung development and decreases postnatally. Further, hyperoxia treatment maintains high levels of miR-154 in alveolar type 2 cells (AT2). We hypothesized that the decrease in miR-154 expression in AT2 cells is required for normal alveologenesis. To test this hypothesis, we generated a novel transgenic mouse allowing doxycycline-based miR-154 overexpression. Maintenance of miR-154 expression in the postnatal distal lung epithelium under normoxia conditions is sufficient to reproduce the hypoalveologenesis phenotype triggered by hyperoxia. Using a pull-down assay, we identified Caveolin1 as a key downstream target of miR-154. Caveolin1 protein is downregulated in response to overexpression of miR-154. This is associated with increased phosphorylation of Smad3 and Tgf-ß signaling. We found that AT2 cells overexpressing miR-154 display decreased expression of AT2 markers and increased expression of AT1 markers. Conclusion: Our results suggest that down-regulation of miR-154 in postnatal lung may function as an important physiological switch that permits the induction of the correct alveolar developmental program, while conversely, failure to down-regulate miR-154 suppresses alveolarization, leading to the common clinically observed phenotype of alveolar simplification.