Multinucleated giant cells appear in the inflamed tissues of granulomatous lung diseases. These giant cells are thought to be formed from macrophages by fusion, but its mechanism is not fully understood. Interferon-gamma (IFN-gamma) is a lymphokine that activates macrophages. In this report, we examined the in vitro effect of recombinant IFN-gamma on activation and fusion of human alveolar macrophages. Adding IFN-gamma to the culture promoted fusion of alveolar macrophages in a time- and dose-dependent manner, but untreated control macrophages remained mostly mononuclear. The fusion rate attained a maximum of about 20% on Day 5, and the number of nuclei per cell increased in parallel with the increase in IFN-gamma concentration. Adding IFN-gamma also activated some functions of the alveolar macrophages, as measured by increased glucose consumption and cytostatic activity against HeLa cells. Maximal cytostatic activity was obtained by adding 1,000 units/ml of IFN-gamma. The glucose consumption of alveolar macrophages from patients with cancer was relatively low, but IFN-gamma restored their glucose consumption approximately to the level in a healthy volunteer and in patients with pneumonia. Dexamethasone inhibited both the fusion and the activation of alveolar macrophages induced by IFN-gamma. These results suggest that IFN-gamma is involved in the pathogenesis of pulmonary granuloma formation by inducing activation and fusion of alveolar macrophages. The inhibitory effect of dexamethasone appears to reflect its therapeutic effects in treating patients with granulomatous lung diseases.