Background: While acute lung injury (ALI) is among the most serious postoperative pulmonary complications, its incidence, risk factors and outcome have not been prospectively studied. Objective: To determine the incidence and survival of ALI associated postoperative respiratory failure and its association with intraoperative ventilator settings, specifically tidal volume. Design: Prospective, nested, case control study. Setting: Single tertiary referral centre. Patients: 4420 consecutive patients without ALI undergoing high risk elective surgeries for postoperative pulmonary complications. Measurements: Incidence of ALI, survival and 2:1 matched case control comparison of intraoperative exposures. Results: 238 (5.4%) patients developed postoperative respiratory failure. Causes included ALI in 83 (35%), hydrostatic pulmonary oedema in 74 (31%), shock in 27 (11.3%), pneumonia in nine (4%), carbon dioxide retention in eight (3.4%) and miscellaneous in 37 (15%). Compared with match controls (n = 166), ALI cases had lower 60 day and 1 year survival (99% vs 73% and 92% vs 56%; p2O) but not tidal volume (OR 1.03; 95% CI 0.84 to 1.26 ml/kg), positive end expiratory pressure (OR 0.89; 95% CI 0.77 to 1.04 cm H2O) or fraction of inspired oxygen (OR 1.0; 95% CI 0.98 to 1.03) were associated with ALI. Conclusion: ALI is the most common cause of postoperative respiratory failure and is associated with markedly lower postoperative survival. Intraoperative tidal volume was not associated with an increased risk for early postoperative ALI.