We tested the hypothesis that in vitro nicotine exposure disrupts specific epithelial-mesenchymal paracrine signaling pathways and results in pulmonary interstitial lipofibroblast (LIF)-to-myofibroblast (MYF) transdifferentiation, resulting in altered pulmonary development and function. Studies were done to determine whether nicotine induces LIF-to-MYF transdifferentiation and to elucidate underlying molecular mechanism(s) involved and to determine whether nicotine-induced LIF-to-MYF transdifferentiation could be prevented by stimulating specific alveolar interstitial fibroblast lipogenic pathway. WI38 cells, a human embryonic pulmonary fibroblast cell line, were treated with nicotine with or without specific agonists of alveolar fibroblast lipogenic pathway, PTHrP, DBcAMP, or the potent PPARγ stimulant rosiglitazone (RGZ) for 7 days. Expression of key lipogenic and myogenic markers was examined by RT-PCR, Western hybridization, and immunohistochemistry. The effect of nicotine on triglyceride uptake by WI38 cells and PTHrP binding to its receptor was also determined. Finally, the effect of transfecting WI38 cells with a PPARγ expression vector on nicotine-induced LIF-to-MYF transdifferentiation was determined. Nicotine treatment resulted in significantly decreased expression of lipogenic and increased expression of myogenic markers in a dose-dependent manner, indicating nicotine-induced LIF-to-MYF transdifferentiation. This was accompanied by decreased PTHrP receptor binding to its receptor. The nicotine-induced LIF-to-MYF transdifferentiation was completely prevented by concomitant treatment with PTHrP, DBcAMP, RGZ, and by transiently overexpressing PPARγ. Our data suggest nicotine induces alveolar LIF-to-MYF transdifferentiation through a mechanism involving downregulation of lipogenic PTHrP-mediated, cAMP-dependent PKA signaling pathway, which can be prevented using specific molecular targets. Potential therapeutic implications of these observations against in utero nicotine-induced lung injury remain to be tested.