Fibrosis is a multicellular process leading to excessive extracellular matrix deposition. Factors that affect lung epithelial cell proliferation and activation may be important regulators of the extent of fibrosis after injury. We and others have shown that activated alveolar epithelial cells (AECs) directly contribute to fibrogenesis by secreting mesenchymal proteins, such as type I collagen. Recent evidence suggests that epithelial cell acquisition of mesenchymal features during carcinogenesis and fibrogenesis is regulated by several mesenchymal transcription factors. Induced expression of direct inhibitors to these mesenchymal transcription factors offers a potentially novel therapeutic strategy. Inhibitor of DNA-binding 2 (Id2) is an inhibitory helix-loop-helix transcription factor that is highly expressed by lung epithelial cells during development and has been shown to coordinate cell proliferation and differentiation of cancer cells. We found that overexpression of Id2 in primary AECs promotes proliferation by inhibiting a retinoblastoma protein/c-Abl interaction leading to greater c-Abl activity. Id2 also blocks transforming growth factor β1-mediated expression of type I collagen by inhibiting Twist, a prominent mesenchymal basic helix-loop-helix transcription factor. In vivo, Id2 induced AEC proliferation and protected mice from lung fibrosis. By using a high-throughput screen, we found that histone deacetylase inhibitors induce Id2 expression by adult AECs. Collectively, these findings suggest that Id2 expression by AECs can be induced, and overexpression of Id2 affects AEC phenotype, leading to protection from fibrosis.