Fibroblast growth factor (Fgf) 10 is a critical regulator of bud formation during lung morphogenesis. fgf10 is expressed in distal lung mesenchyme at sites of prospective budding from the earliest developmental stages and signals through its epithelial receptor Fgfr2b. Experiments in intact lung organ cultures demonstrate that Fgf10 is a chemotactic factor for distal, but not for proximal, epithelium. This differential response suggests the involvement of an additional mechanism regulating Fgf10-Fgfr2b interactions, because Fgfr2b is uniformly expressed throughout the respiratory tract. Here we use an immunohistochemistry-based binding assay to show that O-sulfated heparan sulfates (HS) are critical for Fgf10 binding to the distal epithelium. We show that altering endogenous gradients of HS sulfation with sodium chlorate or over-O-sulfated synthetic heparin in lung organ cultures dramatically decreases Fgf10 binding. Moreover, we show that under these conditions epithelial binding is not improved by providing exogenous FGF10. Our data suggest that, not only ligand availability, but also the presence of specific patterns of HS modification in the distal lung epithelium are critical determinants of Fgf10 binding to the epithelium and signaling.