Atrial natriuretic peptide (ANP) and its receptors natriuretic peptide receptor (NPR)-A and NPR-C are all highly expressed in alveolar epithelial type II cells (AEC2s) in the late-gestation ovine fetal lung and are dramatically decreased postnatally. However, of all the components, NPR-C stimulation inhibits ANP-mediated surfactant secretion. Since alveolar oxygen increases dramatically after birth, and steroids are administered to mothers antenatally to enhance surfactant lung maturity, we investigated the effects of O2 concentration and steroids on NPR-C-mediated surfactant secretion in AEC2s. NPR-C expression was highest at 5% O2 while being suppressed by 21% O2, in cultured mouse lung epithelial cells (MLE-15s) and/or human primary AEC2s. Surfactant protein-B (SP-B) was significantly elevated in media from both in vitro and ex vivo culture at 13% O2 versus 21% O2 in the presence of ANP or terbutaline (TER). Both ANP and C-ANP (an NPR-C agonist) attenuated TER-induced SP-B secretion; this effect was reversed by dexamethasone (DEX) pretreatment in AEC2s and by transfection with NPR-C siRNA in MLE-15 cells. DEX markedly reduced AEC2 NPR-C expression, and pregnant ewes treated with betamethasone showed reduced ANP in fetal sheep lung fluid. These data suggest that elevated O2 downregulates AEC2 NPR-C and that steroid-mediated NPR-C downregulation in neonatal lungs may provide a novel mechanism for their effect on perinatal surfactant production.