The cell type specific sequences of transcriptional programs during lung regeneration have remained elusive. Using time-series single cell RNA-seq of the bleomycin lung injury model, we resolved transcriptional dynamics for 28 cell types. Trajectory modeling together with lineage tracing revealed that airway and alveolar stem cells converge on a unique Krt8 + transitional stem cell state during alveolar regeneration. These cells have squamous morphology, feature p53 and NFkB activation and display transcriptional features of cellular senescence. The Krt8+ state appears in several independent models of lung injury and persists in human lung fibrosis, creating a distinct cell–cell communication network with mesenchyme and macrophages during repair. We generated a model of gene regulatory programs leading to Krt8+ transitional cells and their terminal differentiation to alveolar type-1 cells. We propose that in lung fibrosis, perturbed molecular checkpoints on the way to terminal differentiation can cause aberrant persistence of regenerative intermediate stem cell states.