Developmentally expressed genes are believed to play a central role in tissue repair after injury; however, in lung disease their role has not been established. This study demonstrates that SFRP1, an inhibitor of Wnt signaling normally expressed during lung embryogenesis, is induced in the lungs of emphysema patients and in two murine models of the disease. SFRP1 was found to be essential for alveolar formation as Sfrp1^−/− mice exhibited aberrant Wnt signaling, mesenchymal proliferation, and impaired alveoli formation. In contrast, SFRP1 activated ERK and up-regulated MMP1 and MMP9 without altering TIMP1 production when expressed in human lung epithelial cells. These findings demonstrate that SFRP1 promotes normal alveolar formation in lung development, although its expression in the adult up-regulates proteins that can cause tissue destruction. Thus, SFRP1 induction during tissue injury is unlikely to contribute to the repair response but rather is a participatory factor in the pathogenesis of emphysema and tissue destruction.