Many lung diseases result from a failure of efficient regeneration of damaged alveolar epithelial cells (AECs) after lung injury. During regeneration, AEC2s proliferate to replace lost cells, after which proliferation halts and some AEC2s transdifferentiate into AEC1s to restore normal alveolar structure and function. Although the mechanisms underlying AEC2 proliferation have been studied, the mechanisms responsible for halting proliferation and inducing transdifferentiation are poorly understood. To identify candidate signaling pathways responsible for halting proliferation and inducing transdifferentiation, we performed single cell RNA sequencing on AEC2s during regeneration in a murine model of lung injury induced by intratracheal LPS. Unsupervised clustering revealed distinct subpopulations of regenerating AEC2s: proliferating, cell cycle arrest, and transdifferentiating. Gene expression analysis of these transitional subpopulations revealed that TGFÎ² signaling was highly upregulated in the cell cycle arrest subpopulation and relatively downregulated in transdifferentiating cells. In cultured AEC2s, TGFÎ² was necessary for cell cycle arrest but impeded transdifferentiation. We conclude that during regeneration after LPS-induced lung injury, TGFÎ² is a critical signal halting AEC2 proliferation but must be inactivated to allow transdifferentiation. This study provides insight into the molecular mechanisms regulating alveolar regeneration and the pathogenesis of diseases resulting from a failure of regeneration.