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Reducing inflammatory damage and improving alveolar epithelium regeneration are two key approaches to promoting lung repair in acute lung injury/acute respiratory distress syndrome (ALI/ARDS). Stimulation of cholinergic α7 nicotinic acetylcholine receptor (α7nAChR, coded by Chrna7) signaling could dampen lung inflammatory injury. However, whether activation of α7nAChR in alveolar type II (AT2) cells promotes alveolar epithelial injury repair and underlying mechanisms is elusive. Here, we found that α7nAChR was expressed on AT2 cells and was upregulated in response to LPS-induced ALI. Meanwhile, deletion of Chrna7 in AT2 cells impeded lung repair process and worsened lung inflammation in ALI. Using in vivo AT2 lineage–labeled mice and ex vivo AT2 cell–derived alveolar organoids, we demonstrated that activation of α7nAChR expressed on AT2 cells improved alveolar regeneration by promoting AT2 cells to proliferate and subsequently differentiate toward alveolar type I cells. Then, we screened out the WNT7B signaling pathway by the RNA-Seq analysis of in vivo AT2 lineage–labeled cells and further confirmed its indispensability for α7nAChR activation–mediated alveolar epithelial proliferation and differentiation. Thus, we have identified a potentially unrecognized pathway in which cholinergic α7nAChR signaling determines alveolar regeneration and repair, which might provide us a novel therapeutic target for combating ALI.