In wound healing epidermal-dermal interactions are known to regulate keratinocyte proliferation and differentiation. To find out how fibroblasts respond to epithelial stimuli, we characterized fibroblasts in monolayer co-culture with keratinocytes. On co-culture numerous extracellular matrix- and smooth muscle cell-associated gene transcripts were up-regulated in fibroblasts, suggesting a differentiation into myofibroblasts. Increased alpha-smooth muscle actin (alpha-SMA) protein expression in co-cultured fibroblasts started at approximately day 4, was serum-independent, but required endogenous transforming growth factor (TGF)-beta. In co-cultures, TGF-beta neutralizing monoclonal antibody strongly reduced alpha-SMA induction. Endogenous TGF-beta production and activation were increased at 24 and 48 hours, requiring, like alpha-SMA induction, close keratinocyte-fibroblast proximity. As myofibroblast differentiation only started after 4 days, we analyzed the presence of endogenous inhibitors at early time points. Blocking keratinocyte-derived interleukin (IL)-1 using IL-1 receptor antagonist, alpha-SMA expression in co-cultures was potentiated. Conversely, adding exogenous IL-1alpha completely suppressed endogenous alpha-SMA induction. In co-cultured fibroblasts strong nuclear factor-kappaB binding activity was observed from 2 hours, decreasing at 2 and 4 days, suggesting an early, IL-1-mediated inhibition of TGF-beta signaling in co-cultured fibroblasts. This biphasic differentiation event is regulated by the balance of endogenous TGF-beta and IL-1 activity and is reminiscent of myofibroblast differentiation at early and later stages of wound healing.