Mesenchymal stem cells (MSCs) from bone marrow are a potential source for reconstructive therapy. In vitro, MSCs differentiate into cells of mesodermal and ectodermal lineages but rarely into cells of endodermal lineage. We developed an in vitro model to study the endodermal differentiation of MSCs using co-culture of MSCs and transformed lung epithelial (A-549) cells. The cells were separated using a cell-impermeable membrane to eliminate the possibility of cell fusion. Under these conditions, MSCs expressed several lung epithelial markers (cytokeratins 5, 8, 14, 18, 19, pro-surfactant protein C, zonula occludens-1), detected using quantitative reverse transcriptase polymerase chain reaction and Western blot, and beta-catenin signaling was activated in MSCs. Treatment of MSCs with 10 to 20 mM lithium chloride activated the beta-catenin pathway and enhanced expression of epithelial markers, although this activation was transient. We conclude that A-549 cells can trigger epithelial differentiation of MSCs by a paracrine mechanism that may include activation of beta-catenin signaling.