The plasticity of differentiated cells in adult tissues undergoing repair is an area of intense research. Pulmonary alveolar type II cells produce surfactant and function as progenitors in the adult, demonstrating both self-renewal and differentiation into gas exchanging type I cells. In vivo, type I cells are thought to be terminally differentiated and their ability to give rise to alternate lineages has not been reported. Here we show that Hopx becomes restricted to type I cells during development. However, unexpectedly, lineage-labelled Hopx(+) cells both proliferate and generate type II cells during adult alveolar regrowth following partial pneumonectomy. In clonal 3D culture, single Hopx(+) type I cells generate organoids composed of type I and type II cells, a process modulated by TGFβ signalling. These findings demonstrate unanticipated plasticity of type I cells and a bidirectional lineage relationship between distinct differentiated alveolar epithelial cell types in vivo and in single-cell culture.