Telomere syndromes have their most common manifestation in lung disease that is recognized as idiopathic pulmonary fibrosis and emphysema. In both conditions, there is loss of alveolar integrity, but the underlying mechanisms are not known. We tested the capacity of alveolar epithelial and stromal cells from mice with short telomeres to support alveolar organoid colony formation and found that type 2 alveolar epithelial cells (AEC2s), the stem cell-containing population, were limiting. When telomere dysfunction was induced in adult AEC2s by conditional deletion of the shelterin component telomeric repeat-binding factor 2, cells survived but remained dormant and showed all the hallmarks of cellular senescence. Telomere dysfunction in AEC2s triggered an immune response, and this was associated with AEC2-derived up-regulation of cytokine signaling pathways that are known to provoke inflammation in the lung. Mice uniformly died after challenge with bleomycin, underscoring an essential role for telomere function in AEC2s for alveolar repair. Our data show that alveoloar progenitor senescence is sufficient to recapitulate the regenerative defects, inflammatory responses, and susceptibility to injury that are characteristic of telomere-mediated lung disease. They suggest alveolar stem cell failure is a driver of telomere-mediated lung disease and that efforts to reverse it may be clinically beneficial.