Hypoxia and loss of cell polarity are common features of malignant carcinomas. Hypoxia-inducible factor 1 (HIF1) is the major regulator of cellular hypoxia response through activation of ∼300 genes. Increased HIF1 signaling is known to be associated with epithelial-mesenchymal transformation. Here we report that hypoxia disrupts polarized epithelial morphogenesis of MDCK cells in HIF1α-dependent manner by modulating the transforming growth factor β (TGFβ) signaling pathway. Analysis of potential HIF1 targets in the TGFβ pathway identified the bone morphogenetic protein and activin membrane-bound inhibitor (BAMBI), a transmembrane glycoprotein related to the type I receptors of the TGFβ family, whose expression was essentially lost in HIF1-depleted cells. Similar to HIF1-deficient cells, BAMBI-depleted cells failed to efficiently activate TGFβ signaling and retained epithelial polarity in hypoxia. Taken together, we show that hypoxic conditions promote TGFβ signaling in HIF1-dependent manner and BAMBI is identified in this pathway as a novel HIF1 regulated gene that contributes to hypoxia-induced loss of epithelial polarity.