Adaptation to air breathing after birth is dependent upon the synthesis and secretion of pulmonary surfactant by alveolar type 2 (AT2) cells. Surfactant, a complex mixture of phospholipids and proteins, is secreted into the alveolus, where it reduces collapsing forces at the air-liquid interface to maintain lung volumes during the ventilatory cycle. ABCA3, an ATP-dependent Walker domain containing transport protein, is required for surfactant synthesis and lung function at birth. Mutations in ABCA3 cause severe surfactant deficiency and respiratory failure in newborn infants. We conditionally deleted the Abca3 gene in AT2 cells in the mature mouse lung. Loss of ABCA3 caused alveolar cell injury and respiratory failure. ABCA3-related lung dysfunction was associated with surfactant deficiency, inflammation, and alveolar-capillary leak. Extensive but incomplete deletion of ABCA3 caused alveolar injury and inflammation, and it initiated proliferation of progenitor cells, restoring ABCA3 expression, lung structure, and function. M2-like macrophages were recruited to sites of AT2 cell proliferation during the regenerative process and were present in lung tissue from patients with severe lung disease caused by mutations in ABCA3. The remarkable and selective regeneration of ABCA3-sufficient AT2 progenitor cells provides plausible approaches for future correction of ABCA3 and other genetic disorders associated with surfactant deficiency and acute interstitial lung disease.