Prolonged fetal tracheal occlusion (TO) accelerates lung growth but leads to loss of alveolar epithelial type II (AE2) cells. In contrast, temporary TO leads to recovery of AE2 cells and their ability to produce surfactant. The aim of this study was to determine the effects of temporary TO in fetal sheep with lung hypoplasia on postnatal lung function, structure, and surfactant protein mRNA expression. Diaphragmatic hernia (DH) was created in 22 fetal sheep at 65 days of gestation. TO was performed between 110 days of gestation and full term (DH/TO, n = 7) and between 110 and 130 days of gestation (DH/TO+R, n = 6). Sham-operated fetuses (n = 11) served as controls. Lambs were delivered at approximately 139 days of gestation, and blood gas tensions were monitored over a 2-h resuscitation period. Temporary TO increased growth of the hypoplastic lung and restored surfactant protein mRNA expression and AE2 cell density but did not improve respiratory function above that of animals that underwent prolonged TO; DH/TO and DH/TO+R lambs were hypoxic and hypercapnic compared with Sham animals. Lung compliance remained low in DH/TO+R lambs, most likely as a consequence of the persistent increase in alveolar wall thickness in these animals.