**Core Concept**
Pulmonary surfactant is a complex mixture of lipids and proteins that reduces surface tension within the lungs, facilitating easier expansion during inhalation. In premature infants, the surfactant production is immature, leading to inadequate surfactant levels and increased surface tension, resulting in respiratory distress.

**Why the Correct Answer is Right**
Surfactant deficiency in premature infants disrupts the normal lung expansion, causing alveolar collapse and atelectasis. This leads to increased work of breathing, respiratory distress, and eventually, hypoxia. The lack of surfactant also activates the inflammatory response, causing further lung injury. The type II pneumocytes, responsible for surfactant production, are still maturing in premature infants.

**Why Each Wrong Option is Incorrect**
**Option A:** This option is not directly related to the loss of pulmonary surfactant in premature infants. While hypoxia is a consequence of surfactant deficiency, it is not the primary cause.

**Option B:** This option is incorrect because the primary issue in premature infants is not the lack of surfactant production, but rather the immaturity of the type II pneumocytes, which are responsible for surfactant production.

**Option C:** This option is not directly related to the loss of pulmonary surfactant in premature infants. While respiratory distress is a consequence of surfactant deficiency, it is not the underlying cause.

**Option D:** This option is incorrect because while the lungs are not fully developed in premature infants, the primary issue is not the lack of lung growth, but rather the immaturity of the type II pneumocytes and the resulting surfactant deficiency.

**Clinical Pearl / High-Yield Fact**
Premature infants with surfactant deficiency often require exogenous surfactant replacement therapy to improve lung expansion and reduce respiratory distress.

**Correct Answer:** C.