The successful generation of endodermal, ectodermal, and most mesodermal lineages from pluripotent stem cells has resulted in basic discoveries and regenerative medicine clinical trials of cell-based therapies. In contrast, the derivation of tissue-specific mesenchyme via directed differentiation in vitro has markedly lagged, due in part to a limited understanding of the signaling pathways regulating in vivo mesenchymal development and a lack of specific markers or reporters able to purify such

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... lineages. The derivation of lung-specific mesenchyme is a particularly important goal since this tissue plays important roles in lung development and respiratory disease pathogenesis. Here we generate a mouse induced pluripotent stem cell (iPSC) line carrying a lung-specific mesenchymal reporter/lineage tracer facilitating the tracking and purification of engineered lung-specific mesenchyme. We identify the key signaling pathways (RA and Shh) necessary to specify lung mesenchyme from lateral plate mesodermal precursors and find that mouse iPSC-derived lung mesenchyme (iLM) expresses the molecular and functional phenotypes of primary developing lung mesenchyme. Purified iLM can be recombined with separately engineered lung epithelial progenitors, self-organizing into 3-dimensional organoids featuring significantly augmented structural complexity and lineage purity, including interacting juxtaposed layers of epithelium and mesenchyme. Co-culture with iLM increases the yield of lung epithelial progenitors and impacts epithelial and mesenchymal differentiation programs, suggesting functional epithelial-mesenchymal crosstalk. Our iPSC-derived population thus expresses key features of developing lung mesenchyme, providing an inexhaustible source of cells for studying lung development, modeling diseases, and developing therapeutics.