Ventilation of preterm neonates causes pulmonary inflammation that can contribute to lung injury, propagate systemically and result in long-term disease. Modulation of this initial response may reduce lung injury and its sequelae. We aimed to determine the effect of human amnion epithelial cells (hAECs) on immune activation and lung injury in preterm neonatal lambs. Preterm lambs received intratracheal hAECs (90x106) or vehicle, prior to 2 h of mechanical ventilation. Within 5 min of ventilation onset, lambs also received intravenous hAECs (90x106) or vehicle. Lung histology, bronchoalveolar lavage (BAL) cell phenotypes, and cytokine profiles were examined after 2 h of ventilation, and in unventilated controls. Histological indices of lung injury were higher than control, in vehicle-treated ventilated lambs but not in hAEC-treated ventilated lambs. Ventilation-induced pulmonary leukocyte recruitment was greater in hAEC-treated lambs than in vehicle-treated lambs. Lung IL-1β and IL-6 mRNA expression was higher in vehicle- and hAEC-treated ventilated lambs than in controls but IL-8 mRNA levels were greater than control only in vehicle-treated ventilated lambs. Numbers of CD44+ and CD21+ lymphocytes and macrophages from the lungs were altered in vehicle- and hAEC-treated ventilated lambs. Numbers of CD8+ macrophages were lower in hAEC-treated ventilated lambs than in vehicle-treated ventilated lambs. Indices of systemic inflammation were not different between vehicle- and hAEC-treated lambs. Human amnion epithelial cells modulate the pulmonary inflammatory response to ventilation in preterm lambs, and reduce acute lung injury. Immunomodulatory effects of hAECs reduce lung injury in preterm neonates and may protect against longer-term respiratory disease.