Chorioamnionitis alters lung development, resulting in a paradoxical decrease in the incidence of respiratory distress syndrome, but an increase in the incidence of bronchopulmonary dysplasia (BPD). The mechanism(s) underlying this disparity in the pulmonary outcomes is not known. We hypothesized that specific alterations in alveolar epithelial-mesenchymal interactions might explain this apparent disparity in the pulmonary outcome following chorioamnionitis. We determined the effects of Lipopolysaccharide (LPS) on Parathyroid Hormone-related Protein (PTHrP)-driven epithelial-mesenchymal interactions that are essential for normal lung development and homeostasis. Lung explants from embryonic day 19.5 Sprague Dawley rat fetuses were treated with LPS with or without a PTHrP pathway agonist, Prostaglandin J₂ (PGJ₂). LPS treatment affected the production of pro-inflammatory cytokines and the expression of the key markers of the epithelial-mesenchymal paracrine interactions in a time-dependent manner. At 6h there was a significant increase in the expression of PTHrP and the other key markers of alveolar homeostasis without any significant effect on -smooth muscle actin (SMA). In contrast, at 72h there was a significant decrease in the expression of PTHrP and the other key markers of alveolar homeostasis, accompanied by a significant increase in -SMA expression. The cytokine and molecular changes at 72h were completely prevented by the concomitant treatment with the PGJ₂. We speculate that these data provide a likely mechanism for the acute stimulation of lung differentiation, accompanied paradoxically by BPD following chorioamnionitis, and suggest that by specifically targeting the PTHrP signaling, the inflammation-induced molecular injury that is known to result in BPD can be prevented.