To determine the role of respiratory epithelial cells in the inflammatory response to inhaled endotoxin, we selectively inhibited NF-κB activation in the respiratory epithelium using a mutant IκB-α construct that functioned as a dominant negative inhibitor of NF-κB translocation (dnIκB-α). We developed two lines of transgenic mice in which expression of dnIκB-α was targeted to the distal airway epithelium using the human surfactant apoprotein C promoter. Transgene expression was localized to the epithelium of the terminal bronchioles and alveoli. After inhalation of LPS, nuclear translocation of NF-κB was evident in bronchiolar epithelium of nontransgenic but not of transgenic mice. This defect was associated with impaired neutrophilic lung inflammation 4 h after LPS challenge and diminished levels of TNF-α, IL-1β, macrophage inflammatory protein-2, and KC in lung homogenates. Expression of TNF-α within bronchiolar epithelial cells and of VCAM-1 within peribronchiolar endothelial cells was reduced in transgenic animals. Thus targeted inhibition of NF-κB activation in distal airway epithelial cells impaired the inflammatory response to inhaled LPS. These data provide causal evidence that distal airway epithelial cells and the signals they transduce play a physiological role in lung inflammation in vivo.