The extracellular matrix and in particular the basement membrane (BM) play an important role in the induction of organotypic rearrangement of cells in culture. This process involves cell aggregation, sorting into epithelial and mesenchymal components, epithelial cell polarization, and lumen formation. In this study, a combination of laminin (LM) and heparan sulfate proteoglycan (HSPG), two major BM constituents, induced organotypic rearrangement of embryonic mouse lung cells, In the absence of LM/HSPG supplementation, the cells sorted into epithelial and mesenchymal compartments but epithelial cell polarization and lumen formation did not occur. Neither LM nor HSPG alone could trigger this process. Synthetic peptide F-9, representing an amino acid sequence from the inner globular region of the laminin β1 chain (RYVVLPRPVCFEKGMNYTVR) induced organotypic cell rearrangement when substituted for LM. Exogenous LM as well as peptide F-9 were localized at the epithelial-mesenchymal interface of organotypic cultures, where a BM-like structure is formed de novo. Organotypic cell rearrangement was blocked by heparin, heparan sulfate, or antibodies against peptide F-9. Binding assays indicated that peptide F-9 interacts with HSPG but not with LM or type IV collagen. Preincubation of embryonic lung cells with peptide F-9 resulted in a significant increase in cell attachment to HSPG but not to other major BM constituents. These findings suggest that the interaction between LM and BM HSPG is critical for the development of epithelial cell polarization and lumen formation. This interaction occurs at the epithelial-mesenchymal interface and is mediated by a site in the LM molecule represented by peptide F-9 and the-heparan sulfate groups of HSPG.