Keratinocyte growth factor (KGF) is a mitogen for rat type II cells and also stimulates differentiation in vitro. Administration of KGF also protects the lung from a variety of injuries and subsequent development of fibrosis. Because transforming growth factor (TGF)-beta has been shown to inhibit epithelial cell proliferation and surfactant protein gene expression in other systems and is thought to be a major effector in pulmonary fibrosis, we sought to determine if TGF-beta would antagonize the effects of KGF in primary cultures of alveolar type II cells. Type II cells were cultured on a matrix of type I collagen and Matrigel in the presence or absence of KGF and/or TGF-beta. KGF alone greatly stimulated proliferation and increased cyclin-dependent kinase (cdk) 2 kinase activity and Retinoblastoma susceptibility gene product (Rb) phosphorylation. Cyclin D1, cdk2, and cdc25A protein levels were increased, and p15(Ink4b) and p27(Kip1) protein levels were decreased. TGF-beta markedly inhibited alveolar epithelial cell proliferation induced by KGF. TGF-beta inhibited cdk2 enzyme activity and Rb phosphorylation and increased p15(Ink4b) protein levels. TGF-beta also inhibited differentiation induced by KGF as measured by secretion of surfactant protein-A into the apical media. In summary, TGF-beta inhibits the proliferative effect of KGF in vitro and may be a biologic antagonist of KGF.