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. Injury repair is characterized by the generation of transient cell states important for tissue recovery. Here, the authors present a single cell RNA-seq map of recovery from bleomycin lung injury in mice and uncover a Krt8+ transitional stem cell state that precedes the regeneration of AT1 cells and persists in human lung fibrosis.