Thyroid transcription factor-1 (TTF-1/Nkx-2.1) is required for formation of the lung and differentiation of peripheral respiratory epithelial cells. TTF-1 activates transcription of target genes, including the surfactant proteins critical for lung function. A recently identified protein TAZ (transcriptional co-activator with PDZ-binding motif) contains a WW domain and a COOH-terminal PDZ-binding motif that are proposed to mediate its interactions with various transcriptional proteins. To determine the role of TAZ in the regulation of gene expression in the lung, the sites of TAZ expression and the role of TAZ in the regulation of respiratory epithelial gene expression were assessed. TAZ mRNA was detected in immortalized mouse lung epithelial cells, primary isolates of mouse alveolar type II epithelial cells, and epithelial cells of fetal lung. Sites of TAZ mRNA and protein overlapped with those of TTF-1 and surfactant protein C (SP-C) in the respiratory epithelial cells of the mouse lung. In the presence of TTF-1, TAZ synergistically activated the expression of mouse SP-C-luciferase reporter constructs. Mammalian two-hybrid assays and pull-down experiments demonstrated that the TAZ directly interacted with TTF-1. Further, deletion analysis demonstrated that TAZ binds to the NH(2)-terminal domain of TTF-1. TAZ binds to TTF-1, increasing the transcriptional activity of TTF-1 on the SP-C promoter. Developmental and cell-selective regulation of TAZ provides a mechanism by which the activity of TTF-1 on target genes is modulated.