Idiopathic pulmonary fibrosis (IPF) is characterized by activation and injury of epithelial cells, the accumulation of connective tissue and changes in the inflammatory microenvironment. The bone morphogenetic protein (BMP) inhibitor protein gremlin-1 is associated with the progression of fibrosis both in human and mouse lung. We generated a transgenic mouse model expressing gremlin-1 in type II lung epithelial cells using the surfactant protein C (SPC) promoter and the Cre-LoxP system. Gremlin-1 protein expression was detected specifically in the lung after birth and did not result in any signs of respiratory insufficiency. Exposure to silicon dioxide resulted in reduced amounts of lymphocyte aggregates in transgenic lungs while no alteration in the fibrotic response was observed. Microarray gene expression profiling and analyses of bronchoalveolar lavage fluid cytokines indicated a reduced lymphocytic response and a downregulation of interferon-induced gene program. Consistent with reduced Th1 response, there was a downregulation of the mRNA and protein expression of the anti-fibrotic chemokine CXCL10, which has been linked to IPF. In human IPF patient samples we also established a strong negative correlation in the mRNA expression levels of gremlin-1 and CXCL10. Our results suggest that in addition to regulation of epithelial-mesenchymal crosstalk during tissue injury, gremlin-1 modulates inflammatory cell recruitment and anti-fibrotic chemokine production in the lung.