Disruptions to regulatory signals governing stem cell fate open the pathway to tumorigenesis. To determine how these programs become destabilized, we fate-map thousands of murine wild-type and KrasG12D-mutant alveolar type II (AT2) stem cells in vivo and find evidence for two independent AT2 subpopulations marked by distinct tumorigenic capacities. By combining clonal analyses with single-cell transcriptomics, we unveil striking parallels between lung regeneration and tumorigenesis that implicate Il1r1 as a common activator of AT2 reprogramming. We show that tumor evolution proceeds through the acquisition of lineage infidelity and reversible transitions between mutant states, which, in turn, modulate wild-type AT2 dynamics. Finally, we discover how sustained nuclear factor κB (NF-κB) activation sets tumorigenesis apart from regeneration, allowing mutant cells to subvert differentiation in favor of tumor growth.