Tumor-derived prostaglandin E₂ (PGE₂) modifies cytokine balance and inhibits host immunity. We hypothesized that a high level of PGE₂ production by lung tumor cells is dependent on tumor cyclooxygenase (COX)-2 expression. We found that PGE₂ production by A549 non-small cell lung cancer (NSCLC) cells was elevated up to 50-fold in response to interleukin (IL)-1β. Reversal of IL-1β-induced PGE₂ production in A549 cells was achieved by specific pharmacological or antisense oligonucleotide inhibition of COX-2 activity or expression. In contrast, specific COX-1 inhibition was not effective. Consistent with these findings, IL-1β induced COX-2 mRNA expression and protein production in A549 cells. Specific inhibition of COX-2 abrogated the capacity of IL-1β-stimulated A549 cells to induce IL-10 in lymphocytes and macrophages. Furthermore, specific inhibition of A549 COX-2 reversed the tumor-derived PGE₂-dependent inhibition of macrophage IL-12 production when whole blood was cultured in tumor supernatants. Our results indicate that lung tumor-derived PGE₂ plays a pivotal role in promoting lymphocyte and macrophage IL-10 induction while simultaneously inhibiting macrophage IL-12 production. Immunohistochemistry of human NSCLC tissues obtained from lung cancer resection specimens revealed cytoplasmic staining for COX-2 within tumor cells. This is the first description of functional COX-2 expression by NSCLC cells and the definition of a pathway whereby tumor COX-2 expression and a high level of PGE₂ production mediate profound alteration in cytokine balance in the lung cancer microenvironment.