Gas exchange in the lung occurs within alveoli, air-filled sacs composed of type 2 and type 1 epithelial cells (AEC2s and AEC1s), capillaries, and various resident mesenchymal cells. Here, we use a combination of in vivo clonal lineage analysis, different injury/repair systems, and in vitro culture of purified cell populations to obtain new information about the contribution of AEC2s to alveolar maintenance and repair. Genetic lineage-tracing experiments showed that surfactant protein C–positive (SFTPC-positive) AEC2s self renew and differentiate over about a year, consistent with the population containing long-term alveolar stem cells. Moreover, if many AEC2s were specifically ablated, high-resolution imaging of intact lungs showed that individual survivors undergo rapid clonal expansion and daughter cell dispersal. Individual lineage-labeled AEC2s placed into 3D culture gave rise to self-renewing “alveolospheres,” which contained both AEC2s and cells expressing multiple AEC1 markers, including HOPX, a new marker for AEC1s. Growth and differentiation of the alveolospheres occurred most readily when cocultured with primary PDGFRα+ lung stromal cells. This population included lipofibroblasts that normally reside close to AEC2s and may therefore contribute to a stem cell niche in the murine lung. Results suggest that a similar dynamic exists between AEC2s and mesenchymal cells in the human lung.