Human surfactant protein C (hSP-C(1-197)) is synthesized as a 197 amino acid proprotein and cleaved to a mature 3.7 kD form. Although interstitial lung disease in patients with mutations of the hSP-C gene is becoming increasingly recognized, the mechanisms linking molecular events with clinical pathogenesis are not fully defined. We describe a full-term infant with respiratory insufficiency associated with a spontaneous heterozygous mutation resulting in a substitution of lysine for glutamic acid at position 66 (= E66K) of the proximal hSP-C COOH flanking propeptide. Lung histology and biochemical studies of the index patient (hSP-C(E66K)) revealed nonspecific interstitial pneumonia, increased alveolar total phospholipid lacking phosphatidylglycerol, and increased surfactant protein A. Localization of proSP-C from lung sections prepared from this patient using immunofluorescence and immunogold electron microscopy revealed abnormal proSP-C staining in endosomal-like vesicles of type II cells distinct from SP-B. To evaluate the effect of the E66K substitution on intracellular trafficking of proSP-C, fusion proteins consisting of enhanced green fluorescent protein (EGFP) and hSP-C(1-197) (wild type) or mutant hSP-C(E66K) were generated and transfected into A549 cells. EGFP/hSP-C(1-197) was expressed within CD-63-positive, EEA-1-negative vesicles, whereas EGFP/hSP-C(E66K) localized to EEA-1 positive vesicles. The E66K substitution is representative of a new class of SP-C mutation associated with interstitial lung disease that is diverted from the normal biosynthetic pathway. We propose that, similar to other storage disorders, lung injury results from induction of a toxic gain of function induced by the mutant product that is subject to genetic modifiers and environmental influences.