Lung alveoli are lined by squamous alveolar epithelial type 1 (AT1) epithelial cells that facilitate gas exchange, and neighboring AT2 cells that synthesize and secrete surfactant. Alveoli are maintained by intermittent activation of rare ‘bifunctional’ AT2 cells that retain surfactant biosynthesis function but also serve as stem cells, generating new AT1 cells and self-renewing throughout adult life. While stem cell proliferation is controlled by EGFR/KRAS signaling, how the stem cells are selected, maintained, and the fates of their daughter cells controlled are unknown. Here we show that expression of the Wnt target gene Axin2 in mouse lung identifies a rare, stable subpopulation of AT2 cells with stem cell activity. Many lie near single fibroblasts that express Wnt5a and other Wnt genes, and genetically targeting Wnt secretion by fibroblasts depletes the Axin2+ AT2 stem cell population. Axin2 turns off when daughter cells leave the Wnt niche and transdifferentiate into AT1 cells, and sustaining Wnt signaling blocks transdifferentiation whereas abrogation of Wnt signaling promotes it, both in vivo and in vitro. Upon severe alveolar epithelial injury, Axin2 is induced throughout the AT2 population, recruiting ‘ancillary’ AT2 cells into a progenitor role. Niche expression of Wnt5a and the Wnt secretion mediator Porcupine is unchanged by injury, but Wnt7b and several other Wnt genes are broadly induced along with Porcupine in AT2 cells, and pharmacologic or genetic inhibition of this autocrine Wnt signaling impairs the AT2 proliferative response. The results support a model in which individual AT2 cells reside in single cell fibroblast niches that provide a short-range paracrine (or "juxtacrine") Wnt signal that selects and maintains alveolar stem cell identity and proliferative capacity, while severe injury induces AT2 autocrine Wnt signals that transiently expand the stem cell pool during repair.