Intra-alveolar fibrin deposition is a common response to localized and diffuse lung infection and acute lung injury (ALI). We hypothesized that the alveolar epithelium modulates intra-alveolar fibrin deposition through activation of protein C. Our objectives [corrected] were to determine whether components of the protein C activation pathway are present in the alveolar compartment in ALI and whether alveolar epithelium is a potential source. In patients with ALI, pulmonary edema fluid levels of endothelial protein C receptor (EPCR) were higher than plasma, suggesting a source in the lung. To determine whether alveolar epithelial cells are a potential source, protein C activation by A549, small airway epithelial, and primary human alveolar epithelial type II cells was measured. All three cell types express thrombomodulin (TM) and EPCR, and activate protein C on the cell surface. Activation of protein C was inhibited by cytomix (TNF-alpha, IL-1beta, and IFN-gamma). Release of EPCR and TM into the conditioned medium was inhibited by the metalloproteinase inhibitors tumor necrosis factor protease inhibitor (TAPI) and GM6001, indicating that the shedding of EPCR and TM from the alveolar epithelium is mediated by a metalloproteinase. These findings provide new evidence that the alveolar epithelium can modulate the protein C pathway and thus could be an important determinant of alveolar fibrin deposition. Local fibrin deposition may be a fundamental mechanism for the lung to localize and confine injury, thus limiting the risk of dissemination of injury or infection to the systemic circulation.