Idiopathic pulmonary fibrosis is a lethal parenchymal lung disease characterized by denudation of the lung epithelium, fibroblast proliferation, and collagen deposition. Cellular changes underlying disease progression involve injury to alveolar epithelial cells, epithelial to mesenchymal transition, proliferation of α-smooth muscle actin (α-SMA)–expressing myofibroblasts and of fibroblasts resulting in enhanced deposition of extracellular matrix proteins. Hepatocyte growth factor (HGF) inhibits progression of bleomycin-induced pulmonary fibrosis in mice. The mechanism underlying the inhibitory effect of HGF was investigated in an in vitro model. We show that HGF markedly antagonizes basal and transforming growth factor (TGF)-β–induced expression of myofibroblast markers such as α-SMA, collagen type 1, and fibronectin in rat alveolar epithelial cells. HGF also inhibited TGF-β–induced α-SMA expression in primary murine alveolar epithelial cells. Since TGF-β is known to regulate α-SMA expression, the effect of HGF on components of TGF-β signaling was investigated. HGF induced expression of Smad7, an inhibitor of TGF-β signaling, in a mitogen-activated protein kinase–dependent manner. HGF also induced the nuclear export of Smad7 and Smad ubiquitin regulatory factor 1 (Smurf1) to the cytoplasm. HGF-dependent decrease in α-SMA was abolished with specific siRNAs targeted to Smad7. Thus, induction of Smad7 by HGF serves to limit acquisition of the myofibroblast phenotype in alveolar epithelial cells.