Analysis of lung alveolar type 2 (AT2) progenitor stem cells has highlighted fundamental mechanisms that direct their differentiation into alveolar type 1 cells (AT1s) in lung repair and disease. However, microRNA (miRNA) mediated post-transcriptional mechanisms which govern this nexus remain understudied. We show here that the let-7 miRNA family serves a homeostatic role in governance of AT2 quiescence, specifically by preventing the uncontrolled accumulation of AT2 transitional cells and by promoting AT1 differentiation to safeguard the lung from spontaneous alveolar destruction and fibrosis. Using mice and organoid models with genetic ablation of let-7a1/let-7f1/let-7d cluster (let-7afd) in AT2 cells, we demonstrate prevents AT1 differentiation and results in aberrant accumulation of AT2 transitional cells in progressive pulmonary fibrosis. Integration of enhanced AGO2 UV-crosslinking and immunoprecipitation sequencing (AGO2-eCLIP) with RNA-sequencing from AT2 cells uncovered the induction of direct targets of let-7 in an oncogene feed-forward regulatory network including BACH1/EZH2 which drives an aberrant fibrotic cascade. Additional analyses by CUT&RUN-sequencing revealed loss of let-7afd hampers AT1 differentiation by eliciting aberrant histone EZH2 methylation which prevents the exit of AT2 transitional cells into terminal AT1s. This study identifies let-7 as a key gatekeeper of post-transcriptional and epigenetic chromatin signals to prevent AT2-driven pulmonary fibrosis.