After lung injury, damage-associated transient progenitors (DATPs) emerge, representing a transitional state between injured epithelial cells and newly regenerated alveoli. DATPs express profibrotic genes, suggesting that they might promote idiopathic pulmonary fibrosis (IPF). However, the molecular pathways that induce and/or maintain DATPs are incompletely understood. Here we show that the bifunctional kinase/RNase—IRE1α—a central mediator of the unfolded protein response (UPR) to endoplasmic reticulum (ER) stress is a critical promoter of DATP abundance and function. Administration of a nanomolar-potent, monoselective kinase inhibitor of IRE1α (KIRA8)—or conditional epithelial IRE1α gene knockout—both reduce DATP cell number and fibrosis in the bleomycin model, indicating that IRE1α cell-autonomously promotes transition into the DATP state. IRE1α enhances the profibrotic phenotype of DATPs since KIRA8 decreases expression of integrin αvβ6, a key activator of transforming growth factor β (TGF-β) in pulmonary fibrosis, corresponding to decreased TGF-β-induced gene expression in the epithelium and decreased collagen accumulation around DATPs. Furthermore, IRE1α regulates DNA damage response (DDR) signaling, previously shown to promote the DATP phenotype, as IRE1α loss-of-function decreases H2AX phosphorylation, Cdkn1a (p21) expression, and DDR-associated secretory gene expression. Finally, KIRA8 treatment increases the differentiation of Krt19 CreERT2-lineage-traced DATPs into type 1 alveolar epithelial cells after bleomycin injury, indicating that relief from IRE1α signaling enables DATPs to exit the transitional state. Thus, IRE1α coordinates a network of stress pathways that conspire to entrap injured cells in the DATP state. Pharmacological blockade of IRE1α signaling helps resolve the DATP state, thereby ameliorating fibrosis and promoting salutary lung regeneration.