We tested the hypothesis that in vitro nicotine exposure disrupts specific epithelial-mesenchymal paracrine signaling pathways and results in pulmonary interstitial lipofibroblast (LIF)-to-myofibroblast (MYF) transdifferentiation, resulting in altered pulmonary development and function. The studies were done to determine if nicotine induces LIF-to-MYF transdifferentiation and to elucidate the underlying molecular mechanism(s) involved, and to determine if nicotine-induced LIF-to-MYF transdifferentiation could be prevented by stimulating the specific alveolar interstitial fibroblast lipogenic pathway. WI38 cells, a human embryonic pulmonary fibroblast cell line, were treated with nicotine with or without the specific agonists of alveolar fibroblast lipogenic pathway, Parathyroid Hormone Related Protein (PTHrP), dibutryl cAMP, or a potent Peroxisome Proliferator Activated Receptor (PPAR) stimulant, Rosiglitazone (RGZ) for 7 days. Then expression of key lipogenic and myogenic markers was examined by RT-PCR, Western hybridization, and immunohistochemistry. The effect of nicotine on triglyceride uptake by WI38 cells and PTHrP binding to its receptor were also determined. Finally, the effect of transfecting WI38 cells with a PPAR expression vector on nicotine-induced LIF-to-MYF transdifferentiation was determined. Nicotine treatment resulted in significantly decreased expression of lipogenic and increased expression of myogenic markers in a dose-dependent manner, indicating nicotine-induced LIF-to-MYF transdifferentiation. This was accompanied by decreased PTHrP receptor binding to its receptor. The nicotine-induced LIF-to-MYF transdifferentiation was completely prevented by concomitant treatment with PTHrP, dibutryl cAMP, RGZ, as well as by transiently overexpressing PPAR. Our data suggest that nicotine-induces alveolar LIF-to-MYF transdifferentiation through a mechanism that involves down-regulation of the lipogenic PTHrP-mediated, cAMP-dependent PKA signaling pathway, which can be prevented using specific molecular targets. The potential therapeutic implications of these observations against in utero nicotine-induced lung injury remain to be tested.