We ventilated separately the right and left lungs of seven dogs having thoracotomies and catheters in both lower lobe veins. Two hours after right atrial injection of oleic acid, shunt (Qs/QT) in each lower lobe increased from 0.10 to 0.47. Ten minutes after positive end-expiratory pressure (PEEP) was increased from 3 to 13 cmH2O in one lung, mean lobar Qs/QT decreased to 0.06 with no change in its fraction of pulmonary blood flow measured by microsphere techniques. At the same time mean Qs/QT in the other lower lobe was 0.48. At end expiration each lower lobe hilum was then clamped, and the excised lobe was quickly frozen over liquid N2. There was no difference in the extravascular lung liquid per gram blood-free dry lobe between the lower lobes (7.5 +/- 2.6 ml/g), but perivascular cuff liquid was greater in the lower lobe with PEEP (3.8 +/- 2.8 ml/g) than in the lower lobes without PEEP (2.4 +/- 1.7 ml/g). Light microscopy revealed that 77.8 +/- 9.0% of the alveoli were flooded in the lobe without PEEP, but only 22.2 +/- 11.8% were flooded in the lobe with PEEP. The mean linear intercepts of the flooded alveoli were not different between lower lobes, and both were reduced to about 50% of the size of adjacent unflooded units in the same lobe. Alveolar septum thickness was greater without PEEP. We conclude that PEEP reduces Qs/QT by inflating previously flooded and collapsed air spaces and by redistributing the excess alveolar water into the compliant perivascular space, thus eliminating the obstacle to pulmonary O2 transfer.