Tissue inhibitors of metalloproteinases (TIMPs) regulate extracellular matrix (ECM) degradation by matrix metalloproteinases (MMPs). We have examined the role of TIMP-3 on ECM homeostasis and bronchiole branching morphogenesis during murine embryogenesis. Employing an in vitro organ culture system, we found decreased bronchiolar branching in null lungs when compared with wild type (WT) counterparts after 2 days in culture. When a synthetic inhibitor of MMPs at low dose was added to the culture system, branching was augmented regardless of genotype. Gelatin and in situ zymography revealed that null lungs exhibited enhanced activation of MMPs throughout lung development. We analysed the impact of increased MMP activity on a number of ECM molecules by Western blot analysis, but found that only fibronectin abundance was consistently reduced in the null lungs throughout development. To confirm that our observed defect in culture was not simply a developmental delay in the null lung, we examined null and WT lungs from newborn pups. Here, we found not only a reduced number of bronchioles in the null, but also that the bronchiole tubes were dilated compared with controls and that alveologenesis was attenuated. We propose that the deletion of TIMP-3 disrupts the exquisite TIMP/MMP balance required for proper focal ECM proteolysis, which leads to correct bronchiole branching morphogenesis in the developing mouse lung.