Alveolar type II (ATII) cells inhibit fibroblast proliferation in coculture by releasing or secreting a factor(s) that stimulates fibroblast production of prostaglandin E₂ (PGE₂). In the present study, we sought to determine the factors released from ATII cells that stimulate PGE₂ production in fibroblasts. Exogenous addition of rat IL-1α to cultured lung fibroblasts induced PGE₂ secretion in a dose-response manner. When fibroblasts were cocultured with rat ATII cells, IL-1α protein was detectable in ATII cells and in the coculture medium between days 8 and 12 of culture, correlating with the highest levels of PGE₂. Furthermore, under coculture conditions, IL-1α gene expression increased in ATII cells (but not fibroblasts) compared with either cell cultured alone. In both mixed species (human fibroblasts-rat ATII cells) and same species cocultures (rat fibroblasts and ATII cells), PGE₂ secretion was inhibited by the presence of IL-1 receptor antagonist (IL-1Ra) or selective neutralizing antibody directed against rat IL-1α (but not IL-1β). Conditioned media from cocultures inhibited fibroblast proliferation, and this effect was abrogated by the addition of IL-1Ra. Addition of keratinocyte growth factor (KGF) resulted in an earlier increase in PGE₂ secretion and fibroblast inhibition (day 8 of coculture). This effect was inhibited by indomethacin but was not altered by IL-1Ra. We conclude that in this coculture system, IL-1α secretion by ATII cells is one factor that stimulates PGE₂ production by lung fibroblasts, thereby inhibiting fibroblast proliferation. In addition, these studies demonstrate that KGF enhances ATII cell PGE₂ production through an IL-1α-independent pathway.