Although there are many studies focusing on the molecular pathways underlying lung vascular morphogenesis, the extracellular matrix (ECM)–dependent regulation of mesenchymal cell differentiation in vascular smooth muscle development needs better understanding. In this study, we demonstrate that the paired related homeobox gene transcription factor Prx1 maintains the elastic ECM properties, which are essential for vascular smooth muscle precursor cell differentiation. We have found that Prx1null mouse lungs exhibit defective vascular smooth muscle development, downregulated elastic ECM expression, and compromised transforming growth factor (TGF)–β localization and signaling. Further characterization of ECM properties using decellularized lung ECM scaffolds derived from Prx1 mice demonstrated that Prx1 is required to maintain lung ECM stiffness. The results of cell culture using stiffness-controlled 2-D and 3-D synthetic substrates confirmed that Prx1-dependent ECM stiffness is essential for promotion of smooth muscle precursor differentiation for effective TGF-β stimulation. Supporting these results, both decellularized Prx1null lung ECM and Prx1WT (wild type) ECM scaffolds with blocked TGF-β failed to support mesenchymal cell to 3-D smooth muscle cell differentiation. These results suggest a novel ECM-dependent regulatory pathway of lung vascular development wherein Prx1 regulates lung vascular smooth muscle precursor development by coordinating the ECM biophysical and biochemical properties.