In this study, we demonstrate that BMSCs (bone marrow mesenchymal stem cells) can be successfully differentiated into type II alveolar epithelial cells in vitro under mimic pulmonary microenvironment. BMSCs were co-cultured with MRC-5 cells in modified SAGM (small airway growth medium). The BMSC-derived type II alveolar epithelial cells morphologically resemble human lung epithelial cells. They began to appear after 10 days in co-culture and became morphologically dominant after day 15. Correspondingly, SPC (surfactant protein C), a specific functional marker of human type II alveolar epithelial cells, was detected in differentiated cells by RT-PCR (reverse transcription-PCR) analysis after day 15. Immunostaining analysis revealed the present of scattered SPC-positive cells with a differentiation efficiency of 2.43-4.21%. Our study further showed that the SPC gene expression level in differentiated cells was related to the ratio of BMSCs to MRC-5 cells and the components of modified SAGM.