The bronchioles of the murine lung are lined by a simple columnar epithelium composed of ciliated, Clara, and goblet cells that together mediate barrier function, mucociliary clearance and innate host defense, vital for pulmonary homeostasis. In the present work, we demonstrate that expression of Sox2 in Clara cells is required for the differentiation of ciliated, Clara, and goblet cells that line the bronchioles of the postnatal lung. The gene was selectively deleted in Clara cells utilizing Scgb1a1-Cre, causing the progressive loss of Sox2 in the bronchioles during perinatal and postnatal development. The rate of bronchiolar cell proliferation was decreased and associated with the formation of an undifferentiated, cuboidal-squamous epithelium lacking the expression of markers of Clara cells (Scgb1a1), ciliated cells (FoxJ1 and alpha-tubulin), and goblet cells (Spdef and Muc5AC). By adulthood, bronchiolar cell numbers were decreased and Sox2 was absent in extensive regions of the bronchiolar epithelium, at which time residual Sox2 expression was primarily restricted to selective niches of CGRP staining neuroepithelial cells. Allergen-induced goblet cell differentiation and mucus production was absent in the respiratory epithelium lacking Sox2. In vitro, Sox2 activated promoter-luciferase reporter constructs for differentiation markers characteristic of Clara, ciliated, and goblet cells, Scgb1a1, FoxJ1, and Agr2, respectively. Sox2 physically interacted with Smad3 and inhibited TGF-beta1/Smad3-mediated transcriptional activity in vitro, a pathway that negatively regulates proliferation. Sox2 is required for proliferation and differentiation of Clara cells that serve as the progenitor cells from which Clara, ciliated, and goblet cells are derived.