The lung is a relatively quiescent organ during homeostasis, but has a remarkable capacity for repair after injury. Alveolar epithelial type I cells (AEC1s) line airspaces and mediate gas exchange. After injury, they are regenerated by differentiation from their progenitors - alveolar epithelial type II cells (AEC2s) - which also secrete surfactant to maintain surface tension and alveolar patency. While recent studies showed that the maintenance of AEC2 stemness is Wnt dependent, the molecular mechanisms underlying AEC2-AEC1 differentiation in adult lung repair are still incompletely understood. Here we show that WWTR1 (TAZ) plays a crucial role in AEC differentiation. Using an in vitro organoid culture system, we found that tankyrase inhibition can efficiently block AEC2-AEC1 differentiation, and this effect was due to the inhibition of TAZ. In a bleomycin induced lung injury model, conditional deletion of TAZ in AEC2s dramatically reduced AEC1 regeneration during recovery, leading to exacerbated alveolar lesions and fibrosis. In patients with idiopathic pulmonary fibrosis (IPF), decreased blood levels of RAGE, a biomarker of AEC1 health, were associated with more rapid disease progression. Our findings implicate TAZ as a critical factor involved in AEC2 to AEC1 differentiation, and hence the maintenance of alveolar integrity after injury.