Idiopathic pulmonary fibrosis (IPF) is a fatal disease with no known cure that is characterized by progressive fibrotic remodeling of the lung. While the pathophysiology remains unclear, growing evidence suggests that a pro-fibrotic milieu and dysfunctional epithelial repair likely play key roles in IPF. An emergence of airway epithelial like cells of unknown origin is frequently observed in distorted alveolar regions in IFP, which is often referred to as bronchiolisation. We aimed to investigate if a pro-fibrotic environment could drive aberrant trans-differentiation of alveolar epithelial progenitors towards airway epithelial like cells. We used an iPSC-derived air-liquid interface model of directed ATII cell differentiation and treated the cells with an IPF-relevant cocktail (IPF-RC), composed of cytokines previously described to be upregulated in IPF patient lungs. Values are means ± S.E.M., compared by two-tailed unpaired Student’s t-test or Mann-Whitney U-test. Characterization by qRT-PCR, RNAseq, IF and TEM confirmed the ATII-like phenotype of the cultures. IPF-RC stimulation during differentiation resulted in significantly reduced expression of SFTPC (mRNA decreased by 79.1±3.5%, p<0.0001, N=9) and increased airway related transcript expression, including KRT5, SCGB1A1, MUC5B and BPIFB1. In addition, treatment with IPF-RC resulted in elevated MMP-7 (increased to 151.2±21.6% of control, p<0.05, N=3) and MMP-10 (increased to 245.5±42.8% of control, p<0.01, N=3) concentrations in the culture medium. RNAseq revealed a significant overlap of deregulated transcripts between IPF-RC treated cultures and publicly available IPF patient datasets. Thus, we have demonstrated using an iPSC-derived model of alveolar epithelial progenitor cell differentiation that an IPF-related mix of cytokines has the potential to impair ATII differentiation by driving a shift towards an airway epithelial like expression signature, as well as induce IPF biomarker secretion, resembling that observed in IPF lungs. Overall these findings indicate that aberrant alveolar epithelial stem cell differentiation could play a role in IPF-associated bronchiolisation.