TGF-β1 is a multi-functional cytokine that regulates a variety of cellular activities including organogenesis and cell differentiation. In cultured human fetal lung, TGF-β1 delays type II cell differentiation and suppresses expression of surfactant proteins and lipid, acting at the level of transcription, however the post-receptor signaling mechanisms are unknown. In this study we examined the mechanism of TGF-β1 effects on SP-B gene expression in pulmonary H441 adenocarcinoma cells. Treatment of cells with TGF-β1 at 10 ng/ml decreased SP-B mRNA content to <10% of control after 48 h, and this effect was blocked in the presence of the protein kinase inhibitors calphostin C and genestein. In transfection studies using plasmids with SP-B gene fragments linked to thymidine kinase (tk) promoter and chloramphenicol acetyltransferase, responsiveness to TGF-β1 localized to the region (-112/-72 bp) of the proximal promoter which contains binding sites for TTF-1 and HNF3, transcription factors which are critical for expression of all surfactant proteins. By contrast there was no effect of TGFβ on tk or RSV promoters alone. Electromobility shift assays using nuclear extracts of H441 cells and labeled oligonucleotide probes demonstrated ≈75% decrease in TTF-1 and HNF3 binding activity after 24 h TGF-β1 treatment of cells; parallel experiments using cytoplasmic extracts showed a time-dependent accumulation of TTF-1 and HNF3 binding activity. Both of these effects were blocked by protein kinase inhibitors. In immunofluorescence studies of both H441 cells and cultured human fetal lung, TGF-β1 treatment markedly reduced staining for SP-B and caused a shift in staining of TTF-1 and HNF3 from nucleus to cytoplasm. We conclude that TGF-β1, acting via protein kinase(s), down regulates SP-B gene expression in lung epithelial cells by cytoplasmic trapping of TTF-1 and HNF3.