In the fetal lung, endogenous transforming growth factor- (TGF-) inhibits early morphogenesis and blocks hormone-induced type II cell differentiation. We hypothesized that endogenous TGF- inhibits type II cell differentiation and that the stimulatory effects of glucocorticoids result in part from suppression of TGF-. Epithelial cells were isolated from human fetal lung and cultured under defined conditions with and without dexamethasone plus cAMP to promote type II cell differentiation. Control cells produced TGF-, which was activated in part by v6 integrin. Treatment with dexamethasone, but not cAMP, reduced TGF-1 and -2 transcripts and TGF- bioactivity in culture medium. To examine the effects of decreased TGF- in the absence of glucocorticoid, cells were treated with antibodies to TGF- and its receptors. By real time RT-PCR, antibody blockade of TGF- reduced serpine1, a TGF- inducible gene, and increased gene expression for sftpa, sftpb, sftpc and titf1, mimicking the response to hormone treatment. By microarray analysis, 29 additional genes were induced by both TGF- antibody and hormone treatment, and 20 other genes were repressed by both treatments. For some genes, the fold response was comparable for antibody and hormone treatment. We conclude that endogenous TGF- suppresses expression of surfactant proteins and selected other type II cell genes in fetal lung, in part secondary to increased expression of titf1, and we propose that the mechanism of glucocorticoid-induced type II cell differentiation includes antagonism of TGF- gene suppression. Surfactant production during fetal development is likely influenced by relative levels of TGF- and glucococorticoids.