The ability of xanthine oxidase (XO)-derived, partially reduced O2 species (PROS) to inhibit surfactant production was examined in freshly isolated alveolar type II (ATII) pneumocytes from New Zealand White rabbits. [Methyl-3H]choline chloride and [1-14C]palmitate incorporation into phosphatidylcholine (PC) decreased in a dose-dependent manner, whereas peak media hydrogen peroxide (H2O2) concentration increased, when 1, 5, or 10 mU/ml XO were added to cell suspensions containing 500 μM xanthine. Addition of 100 μM allopurinol inhibited H2O2 production and abolished the decrease in choline and palmitate incorporation into PC. ATII cells incubated with 500 μM xanthine alone incorporated choline and palmitate at 90 and 80% of control levels, respectively. However, 100 μM allopurinol restored precursor incorporation to control values. To identify a possible intracellular source of PROS, ATII cell xanthine dehydrogenase (XDH) and XO activities were measured. Both total activity (XDH + XO; 45 ± 7 μU/mg protein) and the percentage activity in the oxidase form (% XO; 30 ± 4%) remained unchanged in ATII cells incubated in media only (control) for 2 h. In contrast, incubation of ATII cells with 500 μM xanthine resulted in a 50% loss of XDH + XO activity and a 21% increase in % XO within 10 min. After 2 h there was no measurable XDH + XO activity in xanthine-treated cells. Total XDH + XO activity in cells incubated with 500 μM xanthine and 100 μM allopurinol was < 6% of control values throughout the incubation. In addition, intracellular H2O2 production in cells in media plus 500 μM xanthine was significantly increased compared to controls, whereas intracellular H2O2 production in ATII cells incubated with 500 μM xanthine and 100 μM allopurinol was similar to controls. We conclude that sublethal concentrations of endogenously produced intracellular or extracellular PROS, all derived from XO, impair surfactant metabolism.