Biliary epithelial cells (BEC) are important targets in some liver diseases, including acute allograft rejection. Although some injured BEC die, many can survive in function compromised states of senescence or phenotypic de-differentiation. This study was performed to examine changes in the phenotype of BEC during acute liver allograft rejection and the mechanism driving these changes. Liver allograft sections showed a positive correlation (p < 0.0013) between increasing T cell mediated acute rejection and the number of BEC expressing the senescence marker p21(WAF1/Cip) or the mesenchymal marker S100A4. This was modeled in vitro by examination of primary or immortalized BEC after acute oxidative stress. During the first 48 h, the expression of p21(WAF1/Cip) was increased transiently before returning to baseline. After this time BEC showed increased expression of mesenchymal proteins with a decrease in epithelial markers. Analysis of TGF-β expression at mRNA and protein levels also showed a rapid increase in TGF-β2 (p < 0.006) following oxidative stress. The epithelial de-differentiation observed in vitro was abrogated by pharmacological blockade of the ALK-5 component of the TGF-β receptor. These data suggest that stress induced production of TGF-β2 by BEC can modify liver allograft function by enhancing the de-differentiation of local epithelial cells.