The extraordinarily thin alveolar type 1 (AT1) cell constitutes nearly the entire gas exchange surface and allows passive diffusion of oxygen into the blood stream. Despite such an essential role, the transcriptional network controlling AT1 cells remains unclear. Using cell-specific knockout mouse models, genomic profiling, and 3D imaging, we found that NK homeobox 2-1 (Nkx2-1) is expressed in AT1 cells and is required for the development and maintenance of AT1 cells. Without Nkx2-1, developing AT1 cells lose 3 defining features—molecular markers, expansive morphology, and cellular quiescence—leading to alveolar simplification and lethality. NKX2-1 is also cell-autonomously required for the same 3 defining features in mature AT1 cells. Intriguingly, Nkx2-1 mutant AT1 cells activate gastrointestinal (GI) genes and form dense microvilli-like structures apically. Single-cell RNA-seq supports a linear transformation of Nkx2-1 mutant AT1 cells toward a GI fate. Whole lung ChIP-seq shows NKX2-1 binding to 68% of genes that are down-regulated upon Nkx2-1 deletion, including 93% of known AT1 genes, but near-background binding to up-regulated genes. Our results place NKX2-1 at the top of the AT1 cell transcriptional hierarchy and demonstrate remarkable plasticity of an otherwise terminally differentiated cell type.