Coronavirus infection causes diffuse alveolar damage leading to acute respiratory distress syndrome. The absence of ex vivo models of human alveolar epithelium is hindering an understanding of coronavirus disease 2019 (COVID-19) pathogenesis. Here, we report a feeder-free, scalable, chemically defined, and modular alveolosphere culture system for the propagation and differentiation of human alveolar type 2 cells/pneumocytes derived from primary lung tissue. Cultured pneumocytes express the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) receptor angiotensin-converting enzyme receptor type-2 (ACE2) and can be infected with virus. Transcriptome and histological analysis of infected alveolospheres mirror features of COVID-19 lungs, including emergence of interferon (IFN)-mediated inflammatory responses, loss of surfactant proteins, and apoptosis. Treatment of alveolospheres with IFNs recapitulates features of virus infection, including cell death. In contrast, alveolospheres pretreated with low-dose IFNs show a reduction in viral replication, suggesting the prophylactic effectiveness of IFNs against SARS-CoV-2. Human stem cell-based alveolospheres, thus, provide novel insights into COVID-19 pathogenesis and can serve as a model for understanding human respiratory diseases.Keywords: ACE2; ARDS; SARS-CoV-2; cytokine storm; interferons; organoids; pneumocytes; protease; respiratory cells; surfactants.