Fibroblasts stimulate alveolar type II epithelial cell differentiation and proliferation in vitro and during lung development. However, little is known about the effects of adult type II cells on fibroblasts. We investigated the effect of adult rat type II cells on proliferation of adult human lung fibroblasts. Fibroblasts were suspended within rat tail collagen which was gelled on a floating polycarbonate filter, and type II cells were cultured on Matrigel. In this coculture system, alveolar type II cells inhibited fibroblast proliferation and indomethacin blocked the inhibitory effect on fibroblast growth. Prostaglandin (PG) E₂, the major PG secreted by type II cells, inhibited fibroblast proliferation and was increased during the period of inhibition of fibroblast proliferation. Incubation with arachidonate showed that most of the PGE₂ in the coculture system was produced by the fibroblasts. In addition, we found that rat type II cells also inhibited rat fibroblasts and that inhibition of fibroblast growth by type II cells could be stimulated by keratinocyte growth factor. We conclude that in this coculture system, type II cells inhibit fibroblast proliferation by secreting a factor(s) that stimulates PGE₂ production by fibroblasts, and that PGE₂ directly inhibits fibroblast proliferation.