Glucocorticoids have been shown to impair lung growth by altering development of the alveolar structure. To characterize the mechanisms involved in this process, we examined the effects of dexamethasone on proliferation of the stem cells of the alveolar epithelium, the type 2 cells. Treatment of type 2 cells with dexamethasone rapidly decreased DNA synthesis, and this effect was observed for concentrations less than 10(-8)M. Inhibition of cell proliferation by glucocorticoids was associated with a marked accumulation of insulin-like growth factor (IGF)-binding protein-2 (IGFBP-2) in the culture medium. Studies of the mechanisms involved in this accumulation indicated that it was associated with an enhanced production of IGFBP-2 and with a similar increase in the level of IGFBP-2 messenger RNA expression without any changes in its stability, as evaluated by actinomycin D experiments. Furthermore, transfection studies using plasmids conveying expression of luciferase gene transcribed from the fragment of rat IBFBP-2 promoter extending from +12 bp relative to the start of transcription plus 1.4 kilobases of the 5'-flanking sequence showed a stimulation of luciferase activity in cells treated with dexamethasone that was similar to the increase in IGFBP-2 messenger RNA and protein. Study of the other components of the IGF system also revealed induction of IGF-II expression upon treatment with dexamethasone. Together with other previously reported results using various modulators of type 2 cell proliferation, the present study strongly suggests that IGFBP-2 is likely to play an important role in the control of alveolar epithelial cell proliferation.