Host factors restricting the transmission of respiratory viruses are poorly characterized. We analyzed the contribution of type I and type III interferon (IFN) using a mouse model in which the virus is selectively administered to the upper airways, mimicking a natural respiratory virus infection. Mice lacking functional IFN-λ receptors (Ifnlr1-/-) no longer restricted virus dissemination from the upper airways to the lungs. Ifnlr1-/- mice shed significantly more infectious virus particles via the nostrils and transmitted the virus much more efficiently to naïve contacts compared with wild-type mice or mice lacking functional type I IFN receptors. Prophylactic treatment with IFN-α or IFN-λ inhibited initial virus replication in all parts of the respiratory tract, but only IFN-λ conferred long-lasting antiviral protection in the upper airways and blocked virus transmission. Thus, IFN-λ has a decisive and non-redundant function in the upper airways that greatly limits transmission of respiratory viruses to naïve contacts.