Injury to the epithelium is integral to the pathogenesis of many inflammatory lung diseases, and epithelial repair is a critical determinant of clinical outcome. However, the signaling pathways regulating such repair are incompletely understood. We used in vitro and in vivo models to define these pathways. Human neutrophils were induced to transmigrate across monolayers of human lung epithelial cells in the physiological basolateral-to-apical direction. This allowed study of the neutrophil contribution not only to the initial epithelial injury, but also to its repair, as manifested by restoration of transepithelial resistance and reepithelialization of the denuded epithelium. Microarray analysis of epithelial gene expression revealed that neutrophil transmigration activated β-catenin signaling, and this was verified by real-time PCR, nuclear translocation of β-catenin, and TOPFlash reporter activity. Leukocyte elastase, likely via cleavage of E-cadherin, was required for activation of β-catenin signaling in response to neutrophil transmigration. Knockdown of β-catenin using shRNA delayed epithelial repair. In mice treated with intratracheal LPS or keratinocyte chemokine, neutrophil emigration resulted in activation of β-catenin signaling in alveolar type II epithelial cells, as demonstrated by cyclin D1 expression and/or reporter activity in TOPGAL mice. Attenuation of β-catenin signaling by IQ-1 inhibited alveolar type II epithelial cell proliferation in response to neutrophil migration induced by intratracheal keratinocyte chemokine. We conclude that β-catenin signaling is activated in lung epithelial cells during neutrophil transmigration, likely via elastase-mediated cleavage of E-cadherin, and regulates epithelial repair. This pathway represents a potential therapeutic target to accelerate physiological recovery in inflammatory lung diseases.