Smoking during pregnancy is a major source of fetal exposure to numerous harmful agents present in tobacco smoke. Lung development involves complex biochemical processes resulting in dramatic changes which continue even after birth. In addition to type I cells which form the blood-air barrier, type II alveolar epithelial (AE) cells have important and diverse functions related to immunological protection and stabilization of the alveolus through synthesis and secretion of the pulmonary surfactant. Apoptosis or programmed cells death is an important physiological process during lung embryogenesis and for the proper maintenance of homeostasis. Caspases are proteases that play important roles in regulating apoptosis. Caspase-3 is the key executioner caspase in the cascade of events leading to cell death by apoptosis. We explored the hypothesis that cigarette smoke extract (CSE) induces apoptosis in fetal rat lung type II AE cells by activation of caspase-3. To analyze these factors, isolated fetal rat lung type II AE cells were used. The cells were exposed to different concentrations of CSE (5%, 10% or 15%) (v/v) for 60 min. The results of the present study showed that CSE induced apoptosis in fetal rat lung type II AE cells with a significant increase (p < 0.05) in caspase-3 activity and decrease in cell proliferation at CSE concentrations of 10% and 15% (v/v). These observations indicate that cigarette smoke extract induces apoptosis by activation of caspase-3 in fetal rat lung type II AE cells in a dose-dependent manner and may potentially alter the regulated development of the lung and the appearance of the surfactant-producing type II alveolar cells which are critical for the establishment of adequate gas exchange at birth.