Pulmonary surfactant protein-C (SP-C) gene-targeted mice (Sftpc(-/-)) develop progressive lung inflammation and remodeling. We hypothesized that SP-C deficiency reduces the ability to suppress repetitive inflammatory injury. Sftpc(+/+) and Sftpc(-/-) mice given three doses of bacterial LPS developed airway and airspace inflammation, which was more intense in the Sftpc(-/-) mice at 3 and 5 days after the final dose. Compared with Sftpc(+/+)mice, inflammatory injury persisted in the lungs of Sftpc(-/-) mice 30 days after the final LPS challenge. Sftpc(-/-) mice showed LPS-induced airway goblet cell hyperplasia with increased detection of Sam pointed Ets domain and FoxA3 transcription factors. Sftpc(-/-) type II alveolar epithelial cells had increased cytokine expression after LPS exposure relative to Sftpc(+/+) cells, indicating that type II cell dysfunction contributes to inflammatory sensitivity. Microarray analyses of isolated type II cells identified a pattern of enhanced expression of inflammatory genes consistent with an intrinsic low-level inflammation resulting from SP-C deficiency. SP-C-containing clinical surfactant extract (Survanta) or SP-C/phospholipid vesicles blocked LPS signaling through the LPS receptor (Toll-like receptor [TLR] 4/CD14/MD2) in human embryonic kidney 293T cells, indicating that SP-C blocks LPS-induced cytokine production by a TLR4-dependent mechanism. Phospholipid vesicles alone did not modify the TLR4 response. In vivo deficiency of SP-C leads to inflammation, increased cytokine production by type II cells, and persistent inflammation after repetitive LPS stimulation.