AbstractOrgan fibrosis is often accompanied by aberrant epithelial reprogramming, culminating in a transformed barrier composed of scar and metaplastic epithelium. Understanding how the scar promotes an abnormal epithelial response could better inform strategies to reverse the fibrotic damage. Here we show that Gli1+ mesenchymal stromal cells (MSCs), previously shown to contribute to myofibroblasts in the scar, promote metaplastic differentiation of airway progenitors into KRT5+ basal cells in vitro and in vivo. During fibrotic repair, Gli1+ MSCs integrate hedgehog activation to promote metaplastic KRT5 differentiation by upregulating BMP antagonism in the progenitor niche. Restoring the balance towards BMP activation attenuated metaplastic KRT5+ differentiation while promoting adaptive alveolar differentiation. Finally, fibrotic human lungs demonstrate altered BMP activation in the metaplastic epithelium. These findings show that Gli1+ MSCs integrate hedgehog signaling as a rheostat to control BMP activation in the progenitor niche to determine regenerative outcome in fibrosis.HighlightsGli1+ MSCs are required for metaplastic airway progenitor differentiation into KRT5+ basal cells.Hedgehog activation of MSCs promotes KRT5 differentiation of airway progenitors by suppressing BMP activation.Restoring BMP activation attenuates metaplastic KRT5 differentiationMetaplastic KRT5+ basal cells in human fibrotic lungs demonstrate altered BMP activation.