Alveolar epithelial type II (ATII) cells are essential for maintaining normal lung homeostasis because they produce surfactant, express innate immune proteins, and can function as progenitors for alveolar epithelial type I (ATI) cells. Although autocrine production of transforming growth factor (TGF)-1 has been shown to promote the transdifferentiation of primary rat ATII to ATI cells in vitro, mechanisms controlling this process still remain poorly defined. Here, evidence is provided that Tgf-1, -2, -3 mRNA and phosphorylated SMAD2 and SMAD3 significantly increase as primary cultures of mouse ATII cells transdifferentiate to ATI cells. Concomitantly, bone morphogenetic protein (Bmp)-2 and -4 mRNA, and phosphorylated SMAD1/5/8 expression decrease. Exogenously supplied recombinant human TGF-1 inhibited BMP signaling and enhanced transdifferentiation by promoting the loss of ATII cell-specific gene expression and weakly stimulating ATI cell-specific gene expression. On the other hand, exogenously supplied recombinant human BMP-4 inhibited TGF- signaling and delayed transdifferentiation by inhibiting the gain in ATI cell-specific gene expression and weakly delaying the loss of ATII cell-specific gene expression. In mouse lung epithelial (MLE15) cells, smallinterfering RNA (siRNA) knockdown of TGF- receptor type-1 enhanced basal expression of ATII genes while siRNA RNA knockdown of BMP receptors type-1a and -1b enhanced basal expression of ATI genes. Together, these results suggest that the rate of ATII cell transdifferentiation is controlled by the opposing actions of BMP and TGF- signaling that switch during the process of transdifferentiation. bone morphogenetic protein; epithelium; transforming growth factor- ALVEOLI OF THE MAMMALIAN LUNG contain two populations of epithelial cells that must work coordinately to provide constant and efficient gas exchange. Alveolar epithelial type I (ATI) cells are large squamous cells that cover 95-99% of the alveolar surface (41). They exchange oxygen and carbon dioxide between the airspace and the underlying microcapillaries and express transport proteins that maintain fluid homeostasis (12). Alveolar epithelial type II (ATII) cells are cuboidal cells that produce pulmonary surfactant and molecules involved in host defense (19). Tritiated thymidine studies in animals injured by oxidant gases have shown how they can also selfrenew and transdifferentiate into ATI cells (1,18,44). Transdifferentiation also occurs when freshly isolated cultures of ATII cells assume an ATI-like phenotype, defined by the appearance of a flattened polygonal morphology, transport properties, and expression of ATI-specific genes such as T1␣ and aquaporin 5 (Aqp5) (5, 6, 15). Growth factors and matrix components affect this process. Autocrine production of transforming growth factor (TGF)-1 promotes transdifferentiation while keratinocyte growth factor (KGF) preserves rat ATII phenotype (3, 7). Treatment of human fetal lung epithelial cells with glucocorticoid and cAMP analogs promotes ATII phe...