Explant culture of the fetal lung, in the absence of serum or hormones, results in precocious biochemical and morphological differentiation of alveolar epithelial cells. In this study we tested the hypothesis that these maturational events are induced by endogenous cAMP. During culture of human fetal lung the content of tissue cAMP increased 140% from days 3-6. Treatment with isobutylmethylxanthine caused a further doubling of cAMP content, and indomethacin blocked most of the increase in cAMP. Isobutylmethylxanthine accelerated and indomethacin inhibited the increases during culture in surfactant protein-A (SP-A), SP-A mRNA, SP-B mRNA, phosphatidylcholine content, and activity of fatty acid synthetase. There was no effect of these treatments on the content of SP-C mRNA, which did not increase during culture. Increasing concentrations of prostaglandins E1 and E2 in the presence of indomethacin produced a parallel stimulation of cAMP content, SP-A, and fatty acid synthetase activity. The temporal increase in SP-A was also blocked by inhibitors of protein kinase-A. In morphological studies, indomethacin-treated explants appeared less mature, with decreased intralumenal volume and more columnar epithelial cells. We conclude that increased tissue cAMP levels, stimulated by endogenous prostaglandins, accelerate differentiation of alveolar epithelial cells during explant culture.