Regeneration of alveolar epithelia following severe pulmonary damage is critical for lung function. We and others have previously shown that Scgb1a1-expressing cells, most likely Clara cells, can give rise to newly generated alveolar type 2 cells (AT2s) in response to severe lung damage induced by either influenza virus infection or bleomycin treatment. In this study, we have investigated cellular pathway underlying the Clara cell to AT2 differentiation. We show that the initial intermediates are bronchiolar epithelial cells that exhibit Clara cell morphology and express Clara cell marker, Scgb1a1, as well as the AT2 cell marker, pro-surfactant protein C (pro-SPC). These cells, referred to as pro-SPC(+) bronchiolar epithelial cells (or SBECs), gradually lose Scgb1a1 expression and give rise to pro-SPC(+) cells in the ring structures in the damaged parenchyma, which appear to differentiate into AT2s via a process sharing some features with that observed during alveolar epithelial development in the embryonic lung. These findings suggest that SBECs are intermediates of Clara cell to AT2 differentiation during the repair of alveolar epithelia following severe pulmonary injury.