Although the lung is a defining feature of air-breathing animals, the pathway controlling the formation of type I pneumocytes, the cells that mediate gas exchange, is poorly understood. In contrast, the glucocorticoid receptor and its cognate ligand have long been known to promote type II pneumocyte maturation; prenatal administration of glucocorticoids is commonly used to attenuate the severity of infant respiratory distress syndrome (RDS). Here we show that knock-in mutations of the nuclear co-repressor SMRT (silencing mediator of retinoid and thyroid hormone receptors) in C57BL/6 mice (SMRTmRID) produces a previously unidentified respiratory distress syndrome caused by prematurity of the type I pneumocyte. Though unresponsive to glucocorticoids, treatment with anti-thyroid hormone drugs (propylthiouracil or methimazole) completely rescues SMRT-induced RDS, suggesting an unrecognized and essential role for the thyroid hormone receptor (TR) in lung development. We show that TR and SMRT control type I pneumocyte differentiation through Klf2, which, in turn, seems to directly activate the type I pneumocyte gene program. Conversely, mice without lung Klf2 lack mature type I pneumocytes and die shortly after birth, closely recapitulating the SMRTmRID phenotype. These results identify TR as a second nuclear receptor involved in lung development, specifically type I pneumocyte differentiation, and suggest a possible new type of therapeutic option in the treatment of RDS that is unresponsive to glucocorticoids.