Alveolar epithelial type II (ATII) cells are essential for maintaining normal lung homeostasis because they produce surfactant, express innate immune proteins, and can function as progenitors for alveolar epithelial type I (ATI) cells. Although autocrine production of transforming growth factor (TGF)-β1 has been shown to promote the transdifferentiation of primary rat ATII to ATI cells in vitro, mechanisms controlling this process still remain poorly defined. Here, evidence is provided that Tgf-β1, -2, -3 mRNA and phosphorylated SMAD2 and SMAD3 significantly increase as primary cultures of mouse ATII cells transdifferentiate to ATI cells. Concomitantly, bone morphogenetic protein (Bmp)-2 and -4 mRNA, and phosphorylated SMAD1/5/8 expression decrease. Exogenously supplied recombinant human TGF-β1 inhibited BMP signaling and enhanced transdifferentiation by promoting the loss of ATII cell-specific gene expression and weakly stimulating ATI cell-specific gene expression. On the other hand, exogenously supplied recombinant human BMP-4 inhibited TGF-β signaling and delayed transdifferentiation by inhibiting the gain in ATI cell-specific gene expression and weakly delaying the loss of ATII cell-specific gene expression. In mouse lung epithelial (MLE15) cells, small-interfering RNA (siRNA) knockdown of TGF-β receptor type-1 enhanced basal expression of ATII genes while siRNA RNA knockdown of BMP receptors type-1a and -1b enhanced basal expression of ATI genes. Together, these results suggest that the rate of ATII cell transdifferentiation is controlled by the opposing actions of BMP and TGF-β signaling that switch during the process of transdifferentiation.