Oxidant-induced injury to the lung is associated with extensive damage to the lung epithelium. Instillation of keratinocyte growth factor (KGF) in the lungs of animals protects animals from oxidant-induced injury but the mechanism of protection is not well understood. An inherent problem in studying KGF function in vivo has been that constitutive overexpression of KGF in the lung causes embryonic lethality with extensive pulmonary malformation. Here we report the development of a stringently regulated, tetracycline-inducible, lung-specific transgenic system that allows regulated expression of KGF in the lung without causing developmental abnormalities from leaky KGF expression. By using this system, we show that exposure of KGF-expressing mice to hyperoxia protects the lung epithelium but not the endothelium from cell death in accordance with the selective expression of KGF receptor on epithelial and not on endothelial cells. Investigations of KGF-induced cell survival pathways revealed KGF-induced activation of the multifunctional pro-survival Akt signaling axis both in vitro and in vivo. Inhibition of KGF-induced Akt activation by a dominant-negative mutant of Akt blocked the KGF-mediated protection of epithelial cells exposed to hyperoxia. KGF-induced Akt activation may play an important role in inhibiting lung alveolar cell death thereby preserving the lung architecture and function during oxidative stress.