Because interferon (IFN)-gamma may attenuate pulmonary fibrosis, we hypothesized that IFN-gamma may regulate transforming growth factor (TGF)-beta production by airway epithelial cells. Human bronchial epithelial cells (HBECs) were incubated with IFN-gamma +/- TGF-beta1, -beta3, or interleukin (IL)-1beta, platelet-derived growth factor (PDGF), epidermal growth factor, and IL-4. TGF-beta2 protein was measured by enzyme-linked immunosorbent assay and mRNA expression for TGF-beta2, Smad 2, 3, 4, and 7 was evaluated by real-time reverse transcriptase-polymerase chain reaction. Localization of Smads 2, 3, 4, and 7 was evaluated by immunostaining. Exogenous TGF-beta1 and 3, IL-1beta, PDGF, and IL-4 enhanced TGF-beta2 release by HBECs (P < 0.01). IFN-gamma reduced basal and TGF-beta or IL-4-augmented TGF-beta2 release, but had little effect on IL-1beta- or PDGF-augmented TGF-beta2 release. IFN-gamma stimulated Smad 7 protein and mRNA expression. Smad 7-specific siRNA decreased Smad 7 protein expression both in control and IFN-gamma-treated cells. The inhibitory effect of IFN-gamma on TGF-beta2 production was abrogated when the HBECs were treated with Smad 7 siRNA. These results suggest that IFN-gamma down regulates TGF-beta2 production by HBECs by regulating Smad 7. Through this mechanism, IFN-gamma may play an important role in tissue remodeling.