BACKGROUND A healthy alveolar epithelium is critical to the gas exchange function of the lungs. As the major cell type of alveolar epithelium, alveolar type 2 (AT2) cells play a critical role in maintaining pulmonary homeostasis by serving as alveolar progenitors during lung injury, inflammation, and repair. Dysregulation of AT2 cells may lead to the development of acute and chronic lung diseases and cancer. The lack of clinically relevant AT2 cell models hampers our ability to understand pulmonary diseases. Here, we sought to establish reversibly immortalized mouse pulmonary alveolar type 2 cells (imPAC2) and investigate their potential in forming alveolar organoids to model pulmonary diseases. METHODS Primary mouse pulmonary alveolar cells (mPACs) were isolated and immortalized with a retroviral expression of SV40 Large T antigen (LTA). Cell proliferation and survival was assessed by crystal violet staining and WST-1 assays. Marker gene expression was assessed by qPCR, Western blotting, and/or immunostaining. Alveolar organoids were generated by using matrigel. Ad-TGF-β1 was used to transiently express TGF-β1. Stable silencing β-catenin or overexpression of mutant KRAS and TP53 was accomplished by using retroviral vectors. Subcutaneous cell implantations were carried out in athymic nude mice. The retrieved tissue masses were subjected to H & E histologic evaluation. RESULTS We immortalized primary mPACs with SV40 LTA to yield the imPACs that were non-tumorigenic and maintained long-term proliferative activity that was reversible by FLP-mediated removal of SV40 LTA. The EpCAM+ AT2-enriched subpopulation (i.e., imPAC2) was sorted out from the imPACs, and was shown to express AT2 markers and form alveolar organoids. Functionally, silencing β-catenin decreased the expression of AT2 markers in imPAC2 cells, while TGF-β1 induced fibrosis-like response by regulating the expression of epithelial-mesenchymal transition markers in the imPAC2 cells. Lastly, concurrent expression of oncogenic KRAS and mutant TP53 rendered the imPAC2 cells a tumor-like phenotype and activated lung cancer-associated pathways. Collectively, our results suggest that the imPAC2 cells may faithfully represent AT2 populations that can be further explored to model pulmonary diseases.