Alveolar epithelial cell type II (AEC2) injury underlies idiopathic pulmonary fibrosis (IPF). Here we show increased Notch1 signaling in AEC2s in human IPF and IPF models, causing enhanced proliferation and de-differentiation of AEC2s. As a result, we observed defective surfactant protein (SP)-B/C processing, elevated alveolar surface tension, repetitive alveolar collapse and development of lung fibrosis. Similar changes were encountered upon pharmacological inhibition of SP-B/C processing in vivo by pepstatin A. Inhibition of Notch signaling in cultured human IPF precision cut lung slices improved surfactant processing capacity of AEC2s and reversed fibrosis. Notch1 therefore offers as novel therapeutic target.\n\nOne sentence summaryNotch1 inhibition restores alveolar epithelial differentiation and surface tension and reverses matrix deposition in lung fibrosis