Lung epithelial cell damage and dysfunctional repair play a role in the development of lung disease. Effective repair likely requires the normal functioning of alveolar stem/progenitor cells. For example, we have shown in a mouse model of bronchopulmonary dysplasia (BPD) that mesenchymal stem cells (MSC) protect against hyperoxic lung injury at least in part by increasing the number of Epcam⁺ Sca-1⁺ distal lung epithelial cells. These cells are capable of differentiating into both small airway (CCSP⁺) and alveolar (SPC⁺) epithelial cells in three-dimensional (3D) organoid cultures. To further understand the interactions between MSC and distal lung epithelial cells, we added MSC to lung progenitor 3D cultures. MSC stimulated Epcam⁺ Sca-1⁺ derived organoid formation, increased alveolar differentiation and decreased self-renewal. MSC-conditioned media was sufficient to promote alveolar organoid formation, demonstrating that soluble factors secreted by MSC are likely responsible for the response. This work provides strong evidence of a direct effect of MSC-secreted factors on lung progenitor cell differentiation.