Mechanical forces are critical for fetal lung development. Using surfactant protein C (SP-C) as a marker, we previously showed that stretch-induced fetal type II cell differentiation is mediated via the ERK pathway. Caveolin-1, a major component of the plasma membrane microdomains, is important as a signaling protein in blood vessels exposed to shear stress. Its potential role in mechanotransduction during fetal lung development is unknown. Caveolin-1 is a marker of type I epithelial cell phenotype. In this study, using immunocytochemistry, Western blotting, and immunogold electron microscopy, we first demonstrated the presence of caveolin-1 in embryonic day 19 (E19) rat fetal type II epithelial cells. By detergent-free purification of lipid raft-rich membrane fractions and fluorescence immunocytochemistry, we found that mechanical stretch translocates caveolin-1 from the plasma membrane to the cytoplasm. Disruption of the lipid rafts with cholesterol-chelating agents further increased stretch-induced ERK activation and SP-C gene expression compared with stretch samples without disruptors. Similar results were obtained when caveolin-1 gene was knocked down by small interference RNA. In contrast, adenovirus overexpression of the wild-type caveolin-1 or delivery of caveolin-1 scaffolding domain peptide inside the cells decreased stretch-induced ERK phosphorylation and SP-C mRNA expression. In conclusion, our data suggest that caveolin-1 is present in E19 fetal type II epithelial cells. Caveolin-1 is translocated from the plasma membrane to the cytoplasm by mechanical stretch and functions as an inhibitory protein in stretch-induced type II cell differentiation via the ERK pathway.