Signaling by fibroblast growth factor 10 (FGF10) through FGFR2b is essential for lung development. Heparan sulfates (HS) are major modulators of growth factor binding and signaling present on cell surfaces and extracellular matrices of all tissues. Although recent studies provide evidence that HS are required for FGF-directed tracheal morphogenesis in Drosophila, little is known about the HS role in FGF10-mediated bud formation in the vertebrate lung. Here, we mapped HS expression in the early lung and we investigated how HS interactions with FGF10-FGFR2b influence lung morphogenesis. Our data show that a specific set of HS low in O-sulfates is dynamically expressed in the lung mesenchyme at the sites of prospective budding near Fgf10-expressing areas. In turn, highly sulfated HS are present in basement membranes of branching epithelial tubules. We show that disrupting endogenous gradients of HS or altering HS sulfation in embryonic lung culture systems prevents FGF10 from inducing local responses and markedly alters lung pattern formation and gene expression. Experiments with selectively sulfated heparins indicate that O-sulfated groups in HS are critical for FGF10 signaling activation in the epithelium during lung bud formation, and that the effect of FGF10 in pattern is in part determined by regional distribution of O-sulfated HS. Moreover, we describe expression of a HS 6-O-sulfotransferase preferentially at the tips of branching tubules. Our data suggest that the ability of FGF10 to induce local budding is critically influenced by developmentally regulated regional patterns of HS sulfation.