Progressive tissue fibrosis is a cause of major morbidity and mortality. Pulmonary fibrosis is an epithelial-mesenchymal disorder in which TGF-β1 plays a central role in pathogenesis. Here we show that follistatin-like 1 (FSTL1) differentially regulates TGF-β and bone morphogenetic protein signaling, leading to epithelial injury and fibroblast activation. Haplodeletion of Fstl1 in mice or blockage of FSTL1 with a neutralizing antibody in mice reduced bleomycin-induced fibrosis in vivo. Fstl1 is induced in response to lung injury and promotes the accumulation of myofibroblasts and subsequent fibrosis. These data suggest that Fstl1 may serve as a novel therapeutic target for treatment of progressive lung fibrosis.