Atopic asthma pathogenesis is driven by the combined effects of airway inflammation generated during responses to viral infections and aeroallergens, and both these pathways are regulated by dendritic cells (DC) that differentiate locally from monocytic precursors. These DCs normally exhibit a sentinel phenotype characterized by active Ag sampling but attenuated presentation capability, which limits the intensity of local expression of adaptive immunity. How this tight control of airway DC functions is normally maintained, and why it breaks down in some atopics leading to immunopathological changes in airway tissues, is unknown. We postulated that signals from adjacent airway epithelial cells (AEC) contribute to regulation of local differentiation of DC. We tested this in a coculture model containing both cell types in a GM-CSF-IL-4-enriched cytokine milieu characteristic of the atopic asthmatic airway mucosa. We demonstrate that contact with AEC during DC differentiation up-regulates expression of the function-associated markers MHC class II, CD40, CD80, TLR3, and TLR4 on DCs with concomitant up-regulation of Ag uptake/processing. Moreover, the AEC-conditioned DCs displayed increased LPS responsiveness evidenced by higher production of IL-12, IL-6, IL-10, and TNF-alpha. The Th2 memory-activating properties of AEC-conditioned DCs were also selectively attenuated. Data from microarray and blocking experiments implicate AEC-derived type 1 IFNs and IL-6 in modulation of DC differentiation. Collectively, these findings suggest that resting AECs modulate local DC differentiation to optimize antimicrobial defenses in the airways and in the process down-modulate capacity for expression of potentially damaging Th2 immunity.