Tissue regeneration involves a multi-step process composed of diverse cellular hierarchies and states that are also implicated in tissue dysfunction and pathogenesis. Here, we leveraged single-cell RNA sequencing analysis in combination with in vivo lineage tracing and organoid models to fine-map trajectories of alveolar lineage cells during injury repair and regeneration. We identified Damage-Associated Transient Progenitors (DATPs) as a distinct AT2-lineaged population arising during alveolar regeneration. Specifically, we found that IL-1β, secreted by interstitial macrophages, primes a subset of Il1r1+AT2 cells for conversion into DATPs, via a Hif1a-mediated glycolysis pathway, that are functional mediators for mature AT1 cell differentiation. Importantly, we show that chronic inflammation mediated by IL-1β prevents differentiation into AT1 cells, leading to aberrant accumulation of DATPs and impaired alveolar differentiation. Our step-wise fine-mapping of cell fate transitions demonstrates how the inflammatory niche impedes alveolar regeneration by directing stem cell fate behavior. ### Competing Interest Statement The authors have declared no competing interest.
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