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Lung epithelial progenitor/stem cells play an important role in pulmonary homeostasis and regeneration. A disturbed crosstalk between fibroblasts and epithelial cells contributes to the loss of lung structure in chronic lung diseases, such as chronic obstructive pulmonary disease (COPD) and idiopathic pulmonary fibrosis (IPF). It is therefore important to understand how fibroblasts and lung epithelial cells interact with each other during regeneration and disease progression. DKK3, secreted by renal tubular epithelial cells, is closely associated with renal fibrosis. Single-cell data indicate that both airway epithelial cells and (alveolar) fibroblasts express DKK3 in the lungs. However, the role of DKK3 in pulmonary fibrosis is unclear. The aim of this work was to establish suitable in vitro culture models to study the interaction between fibroblasts and pneumocytes in regeneration and pathological states. Additionally, the function of DKK3 in lung regeneration and disease states was investigated using an air liquid interface culture (ALI) model and a mouse model for pulmonary fibrosis. Alveolar type 2 cells (AT2) derived from human lungs were differentiated in Matrigel to alveolar organoids which showed a grape-like structure consisting of AT2 cells. Co-culturing with fibroblasts isolated from human lung tissue of different donors during the differentiation phase resulted in a secretory, cystic phenotype of the organoids. Single-cell analysis, histology, and qRT-PCR revealed that such cystic organoids show reduced expression of surfactant protein C (SFTPC) but increased expression of Mucin 5B (MUC5B). There was no expression of the airway epithelial markers keratin 5 (KRT5) and secretoglobin family 1A member 1 (SCGB1A1). Single-cell transcriptomics further showed that the patient-derived fibroblasts co-cultured with pneumocytes were highly activated as seen in murine lung fibrosis models and in IPF patients. Bleomycin treatment further increased the expression of MUC5B, fibrosis markers (e.g. CTHRC1, ACTA2) and DKK3 in organoids co-cultured with fibroblasts. ALI cultures were established with lung epithelial cells and fibroblasts isolated from murine lung tissue. For this purpose, the lung epithelial cells were seeded apically on the filter membrane and the fibroblasts in the basolateral compartment. Single-cell transcriptomics showed that co-cultivation with fibroblasts led to increased expression of AT2 markers in pneumocytes and club cell populations and trans-differentiation of club cells towards pneumocytes. This maintenance of AT2 cells was likely mediated through activation of regulons, such as the Etv5 regulon. The co-culture with fibroblasts led to an increased transepithelial barrier. Conversely, lung epithelial cells induced increased expression of IL-6 and other differentiation factors (e.g. FGFs) in fibroblasts, mediated by activation of signalling pathways (e.g. JAK-STAT3, NF-κB) and the Cebpb regulon. Stimulation with low concentrations of recombinant IL-6 enhanced epithelial barrier formation and expression of AT2 and club cell markers. Lung epithelial cells and fibroblasts isolated from Dkk3 knockout- and wildtype-mice were cultured in the ALI model and 24-well plate, respectively. Single-cell transcriptomics showed that Dkk3 was expressed in basal cells and fibroblasts. Epithetical cells isolated from Dkk3-/- mice developed a significantly reduced transepithelial electrical resistance (TEER). qRT-PCR showed a reduced expression of pneumocyte markers (e.g. Sftpc, Hopx and Aqp5) in Dkk3-/- cultures. The single-cell data showed that the proportion of pneumocytes (AT2, AT1 and AT1 immature cells) was higher in WT cultures than in Dkk3-/- cultures, while the proportion of airway epithelial cells was increased in knockout cultures. qRT-PCR results showed a decreased expression of Sftpc and increased expression of type 1 markers (e.g. Hopx, Aqp5) in wildtype epithelial cells after 4 days of ALI culture, whereas there was no increase in type 1 markers in knockout epithelial cells after 4 days of ALI culture. DKK3-expressing cells were significantly more abundant in fibrotic lesions of IPF patient and in mice with bleomycin-induced pulmonary fibrosis. The lung damage induced by bleomycin was dramatically decreased in Dkk3 knockout mice, as shown by invasive lung function and fibrosis scores. This work shows that overly activated fibroblasts induce aberrant differentiation of alveolar organoids, as observed in chronic lung disease. Alveolar AT2-derived organoids transdifferentiate into MUC5B+ secretory AT2 cells, which have been described in honeycomb structures in IPF. The obtained results suggest that the interaction between fibroblasts and AT2 cells leads to a vicious cycle in IPF progression. The model can be used to further elucidate the interaction between fibroblasts and AT2 cells in IPF and for drug development. In the ALI co-culture model, regulatory loops were identified that mediate regeneration and differentiation of the alveolar epithelium in a cooperative manner with the mesenchymal compartment. DKK3 expressed by epithelial cells or fibroblasts may have a regulatory role in the differentiation of AT2 cells to AT1 cells during lung regeneration. DKK3 has been shown to have a role in promoting lung fibrosis in the bleomycin-dependent mouse model. Thus, the above results suggest that the interaction between alveolar epithelial cells and fibroblasts is important for regeneration and disease progression.