Alveolar macrophages are a unique type of mononuclear phagocytes that populate the external surface of the lung cavity. Early studies have suggested that alveolar macrophages originate from tissue-resident, local precursors, whereas others reported their derivation from blood-borne cells. However, the role of circulating monocytes as precursors of alveolar macrophages was never directly tested. In this study, we show through the combined use of conditional cell ablation and adoptive cell transfer that alveolar macrophages originate in vivo from blood monocytes. Interestingly, this process requires an obligate intermediate stage, the differentiation of blood monocytes into parenchymal lung macrophages, which subsequently migrate into the alveolar space. We also provide direct evidence for the ability of both lung and alveolar macrophages to proliferate.