Background Acute lung injury is characterized by overwhelmingly elevated PAI-1 in both lung edema fluid and the circulating system. The role of increased PAI-1, encoded by Serpine1 gene, in the regeneration of injured lung epithelium has not been understood completely. This study aimed to investigate the role of Serpine1 in the regulation of alveolar type 2 epithelial cell (AT2) fate in a humanized mouse line carrying diseased mutants (Serpine1Tg). Methods Wild type (wt) and Serpine1Tg AT2 cells were either cultured as monolayers or 3D alveolospheres. Colony forming assay and total surface area of organoids were analyzed. AT1 and AT2 cells in organoids were counted by immunohistochemistry and fluorescence-activated cell sorting (FACS). To test the potential effects of elevated PAI-1 on the permeability in the epithelial monolayers, we digitized the biophysical properties of polarized AT2 monolayers grown at the air-liquid interface. Results A significant reduction in total AT2 cells harvested in Serpine1Tg mice was observed compared with wt controls. AT2 cells harvested from Serpine1Tg mice reduced significantly over the wt controls. Spheroids formed by Serpine1Tg AT2 cells were lesser than wt control. Similarly, the corresponding surface area, a readout of realveolarization of injured epithelium, was markedly reduced in Serpine1Tg organoids. FACS analysis revealed a significant suppression in the number of AT2 cells, in particular, the CD44+ subpopulation, in Serpine1Tg organoids. A lesser ratio of AT1:AT2 cells in Serpine1Tg organoids was observed compared with wt cultures. There was a significant increase in transepithelial resistance but not amiloride inhibition. Conclusions Our study suggests elevated PAI-1 in injured lungs downregulates alveolar epithelial regeneration by reducing the AT2 self-renewal, particularly in the CD44+ cells.