Peroxisome proliferator-activated receptor-γ (PPARγ) is an anti-inflammatory molecule. To assess its biological function in lung alveolar epithelial cells, a CCSP-rtTA/(tetO)₇-dnPPARγ bitransgenic mouse model was generated. In this model, a dominant negative (dn) PPARγ-Flag fusion protein was overexpressed in lung alveolar type II (AT II) epithelial cells in an inducible manner to suppress the endogenous PPARγ function. Overexpression of dnPPARγ induces up-regulation of proinflammatory cytokines and chemokines at both mRNA and protein levels in AT II epithelial cells. This up-regulation was due to dnPPARγ directly DNA binding on the promoter regions. Up-regulation of proinflammatory molecules activated multiple intracellular signaling pathways in AT II epithelial cells. In addition, inflammatory CD11b⁺Gr-1⁺ myeloid-derived suppressor cells were significantly accumulated but T cells were decreased in the lung and circulation system of doxycycline-treated mice. In vitro, myeloid-derived suppressor cells from the lung suppressed T-cell proliferation and function. As a pathogenic consequence, emphysema was observed in the doxycycline-treated lung in association with up-regulation of matrix metalloproteases. Chronic inflammation and lung injury also induced conversion of bone marrow mesenchymal stem cells into AT II epithelial cells in bitransgenic mice. These findings support that PPARγ and its negatively regulated downstream genes in AT II epithelial cells possess multiple functions to control alveolar homeostasis through inflammatory and noninflammatory mechanisms.