We recently suggested that alveolar interstitial fibroblast-to-myofibroblast transdifferentiation may be a key mechanism underlying in utero nicotine-induced lung injury. However, the effects of in utero nicotine exposure on fetal alveolar type II (ATII) cells have not been fully determined. Placebo, nicotine (1 mg/kg), or nicotine (1 mg/kg) + the peroxisome proliferator-activated receptor (PPAR)-gamma agonist prostaglandin J(2) (PGJ(2), 0.3 mg/kg) was administered intraperitoneally once daily to time-mated pregnant Sprague-Dawley rats from embryonic day 6 until their death on embryonic day 20. Fetal ATII cells were isolated, and ATII cell proliferation, differentiation (surfactant synthesis), and metabolism (metabolic profiling with the stable isotope [1,2-(13)C(2)]-d-glucose) were determined after nicotine exposure in utero or in vitro. In utero nicotine exposure significantly stimulated ATII cell proliferation, differentiation, and metabolism. Although the effects on ATII cell proliferation and metabolism were almost completely prevented by concomitant treatment with PGJ(2), the effects on surfactant synthesis were not. On the basis of in utero and in vitro data, we conclude that surfactant synthesis is stimulated by nicotine's direct effect on ATII cells, whereas cell proliferation and metabolism are affected via a paracrine mechanism(s) secondary to its effects on the adepithelial fibroblasts. These data provide evidence for direct and indirect effects of in utero nicotine exposure on fetal ATII cells that could permanently alter the "developmental program" of the developing lung. More importantly, concomitant administration of PPAR-gamma agonists can effectively attenuate many of the effects of in utero exposure to nicotine on ATII cells.