Pleuropulmonary blastoma (PPB) is a rare pediatric lung tumor that is often part of an inherited cancer syndrome. PPBs consist of mesenchymal cells that are susceptible to malignant transformation and cysts lined by epithelial cells. In a subset of patients, overgrowth of the cysts by mesenchymal cells leads to sarcoma formation. Here, we show that 11 multiplex PPB families harbor heterozygous germline mutations in DICER1, a gene encoding an endoribonuclease critical to the generation of small noncoding regulatory RNAs. Expression of DICER1 protein was undetectable in the epithelial component of PPB tumors but was retained in the malignant mesenchyme (sarcoma). We hypothesize that loss of DICER1 in the epithelium of the developing lung alters the regulation of diffusible factors that promote mesenchymal proliferation.