Growing international exploitation of rare earth oxides (REOs) for commercial and biological use has increased the possibility of human exposure and adverse health effects. Occupational exposure to rare earth materials in miners and polishers leads to a severe form of pneumoconiosis, while gadolinium-containing MRI contrast agents cause nephrogenic systemic fibrosis in patients with renal impairment. The mechanisms for inducing these adverse pro-fibrogenic effects are of considerable importance for the safety assessment of REO particles as well as presenting opportunities for safer design. In this study, using a well-prepared REO library, we obtained a mechanistic understanding of how REOs induce cellular and pulmonary damage by a compartmentalized intracellular biotransformation process in lysosomes that results in pro-fibrogenic growth factor production and lung fibrosis. We demonstrate that rare earth oxide ion shedding in acidifying macrophage lysosomes leads to biotic phosphate complexation that results in organelle damage due to stripping of phosphates from the surrounding lipid bilayer. This results in nanoparticle biotransformation into urchin shaped structures and setting in motion a series of events that trigger NLRP3 inflammasome activation, IL-1β release, TGF-β1 and PDGF-AA production. However, pretreatment of REO nanoparticles with phosphate in a neutral pH environment prevents biological transformation and pro-fibrogenic effects. This can be used as a safer design principle for producing rare earth nanoparticles for biological use.