Acute respiratory distress syndrome (ARDS) is a devastating disease process characterized by severe acute lung injury, inflammatory cell recruitment to the lung, upregulation of pro-inflammatory cytokines and increased oxidative stress. Epithelial cell injury, diffuse alveolar damage and surfactant dysfunction ensue leading to refractory hypoxemic respiratory failure. There are no specific effective therapies for ARDS and novel therapeutic approaches are desperately needed. In this study we assessed the role of the cytoprotective and anti-inflammatory enzyme heme oxygenase (HO)-1 in a model of nebulized endotoxin-induced acute lung injury. HO-1 null (HO-1 (-/-)) mice exhibited severe physiologic lung dysfunction following lipopolysaccharide (LPS) nebulization, but had similar inflammatory responses as wild-type (WT) mice. However, a dramatic reduction in surfactant protein-B (SP-B) expression was observed in the lungs of LPS-treated HO-1 (-/-) mice compared with similarly treated WT mice. Using reciprocal bone marrow transplantation (BMT) to generate HO-1-chimeric mice, we found that absence of HO-1 in the lung parenchyma, not in bone marrow-derived inflammatory cells, was responsible for enhanced SP-B downregulation and severe physiologic lung dysfunction. These findings have implications for our understanding of the pathophysiology of ARDS and may guide future therapeutic strategies.