The Eya1 gene encodes a transcriptional co-activator that acts with Six1 to control the development of different organs. However, Six1-Eya1 interactions and functional roles in mesenchymal cell proliferation and differentiation as well as alveolarization during the saccular stage of lung development are still unknown. Herein, we provide the first evidence that Six1 and Eya1 act together to regulate mesenchymal development as well as alveolarization during the saccular phase of lung morphogenesis. Deletion of either or both Six1 and Eya1 genes results in a severe saccular phenotype, including defects of mesenchymal cell development and remodeling of the distal lung septae and arteries. Mutant lung histology at the saccular phase shows mesenchymal and saccular wall thickening, and abnormal proliferation of α-smooth muscle actin-positive cells, as well as increased mesenchymal/fibroblast cell differentiation, which become more sever when deleting both genes. Our study indicates that SHH but not TGF-β signaling pathway is a central mediator for the histologic alterations described in the saccular phenotype of Eya1^−/− or Six1^−/− lungs. Indeed, genetic reduction of SHH activity in vivo or inhibition of its activity in vitro substantially rescues lung mesenchymal and alveolar phenotype of mutant mice at the saccular phase. These findings uncover novel functions for Six1–Eya1–SHH pathway during the saccular phase of lung morphogenesis, providing a conceptual framework for future mechanistic and translational studies in this area.