The Grainyhead family of transcription factors controls morphogenesis and differentiation of epithelial cell layers in multicellular organisms by regulating cell junction- and proliferation-related genes. Grainyhead-like 2 (Grhl2) is expressed in developing mouse lung epithelium and is required for normal lung organogenesis. The specific epithelial cells expressing Grhl2 and the genes regulated by Grhl2 in normal lungs are mostly unknown. In these studies we identified the NK2-homeobox 1 transcription factor (Nkx2-1) as a direct transcriptional target of Grhl2. By binding and transcriptional assays and by confocal microscopy we showed that these two transcription factors form a positive feedback loop in vivo and in cell lines and are co-expressed in lung bronchiolar and alveolar type II cells. The morphological changes observed in flattening lung alveolar type II cells in culture are associated with down-regulation of Grhl2 and Nkx2-1. Reduction of Grhl2 in lung epithelial cell lines results in lower expression levels of Nkx2-1 and of known Grhl2 target genes. By microarray analysis we identified that in addition to Cadherin1 and Claudin4, Grhl2 regulates other cell interaction genes such as semaphorins and their receptors, which also play a functional role in developing lung epithelium. Impaired collective cell migration observed in Grhl2 knockdown cell monolayers is associated with reduced expression of these genes and may contribute to the altered epithelial phenotype reported in Grhl2 mutant mice. Thus, Grhl2 functions at the nexus of a novel regulatory network, connecting lung epithelial cell identity, migration, and cell-cell interactions.