Fatty acid synthesis was studied in freshly isolated type II pneumocytes from rabbits by 3H2O and (U-14C)-labeled glucose, lactate and pyruvate incorporation and the activity of acetyl-CoA carboxylase. The rate of lactate incorporation into fatty acids was 3-fold greater than glucose incorporation; lactate incorporation into the glycerol portion of lipids was very low but glucose incorporation into this fraction was approximately equal to incorporation into fatty acids. The highest rate of de novo fatty acid synthesis (3H2O incorporation) required both glucose and lactate. Under these circumstances lactate provided 81.5% of the acetyl units while glucose provided 5.6%. Incubations with glucose plus pyruvate had a significantly lower rate of fatty acid synthesis than glucose plus lactate. The availability of exogenous palmitate decreased de novo fatty acid synthesis by 80% in the isolated cells. In a cell-free supernatant, acetyl-CoA carboxylase activity was almost completely inhibited by palmitoyl-CoA; citrate blunted this inhibition. These data indicate that the type II pneumocyte is capable of a high rate of de novo fatty acid synthesis and that lactate is a preferred source of acetyl units. The type II pneumocyte can rapidly decrease the rate of fatty acid synthesis, probably by allosteric inhibition of acetyl-CoA carboxylase, if exogenous fatty acids are available.