Profound impairment in cellular oxygen consumption, referred to as cytopathic dysoxia, is one of the pathological hallmarks in the lungs of patients with pathogen-induced acute lung injury (ALI). However, the underlying mechanism for this functional defect remains largely unexplored. In this study, we found that primary mouse alveolar epithelial cells (AECs) conducted robust fatty acid oxidation (FAO). More importantly, FAO was strikingly impaired in AECs of mice with LPS-induced ALI. The metabolic deficiency in these cells was likely due to decreased expression of key mediators involved in FAO and mitochondrial bioenergenesis, such as peroxisome proliferator–activated receptor g coactivator (PGC)-1a, carnitine palmitoyltransferase 1A, and medium-chain acyl-CoA dehydrogenase (CAD). We found that treatment of alveolar epithelial line MLE-12 cells with BAL fluids from mice with ALI decreased FAO, and this effect was largely replicated in MLE-12 cells treated with the proinflammatory cytokine TNF-a, which was consistent with downregulations of PGC-1a, carnitine palmitoyltransferase 1A, long-chain CAD, and medium-chain CAD in the same treated cells. Furthermore, we found that the BAL fluids from ALI mice and TNF-a inhibited MLE-12 bioenergenesis and promoted cell apoptosis. In delineation of the role of FAO in ALI in vivo, we found that conditional ablation of AEC PGC-1a aggravated LPS-induced ALI. In contrast, fenofibrate, an activator of the PPAR-a/PGC-1a cascade, protected mice from this pathology. In summary, these data suggest that FAO is essential to AEC bioenergenesis and functional homeostasis. This study also indicates that FAO impairment–induced AEC dysfunction is an important contributing factor to the pathogenesis of ALI.