In the fetal lung, endogenous transforming growth factor (TGF)-beta inhibits early morphogenesis and blocks hormone-induced type II cell differentiation. We hypothesized that endogenous TGF-beta inhibits type II cell differentiation and that the stimulatory effects of glucocorticoids result in part from suppression of TGF-beta. Epithelial cells were isolated from human fetal lung and cultured under defined conditions with and without dexamethasone plus cAMP to promote type II cell differentiation. Control cells produced TGF-beta, which was activated in part by alpha(V)beta(6)-integrin. Treatment with dexamethasone, but not cAMP, reduced TGF-beta1 and -beta2 transcripts and TGF-beta bioactivity in culture medium. To examine the effects of decreased TGF-beta in the absence of glucocorticoid, cells were treated with antibodies to TGF-beta and its receptors. By real-time RT-PCR, antibody blockade of TGF-beta reduced serpine1, a TGF-beta-inducible gene, and increased gene expression for sftpa, sftpb, sftpc, and titf1, mimicking the response to hormone treatment. By microarray analysis, 29 additional genes were induced by both TGF-beta antibody and hormone treatment, and 20 other genes were repressed by both treatments. For some genes, the fold response was comparable for antibody and hormone treatment. We conclude that endogenous TGF-beta suppresses expression of surfactant proteins and selected other type II cell genes in fetal lung, in part secondary to increased expression of titf1, and we propose that the mechanism of glucocorticoid-induced type II cell differentiation includes antagonism of TGF-beta gene suppression. Surfactant production during fetal development is likely influenced by relative levels of TGF-beta and glucocorticoids.