Reciprocal interactions between alveolar fibroblasts and epithelial cells are crucial for lung homeostasis, injury repair, and fibrogenesis, but underlying mechanisms remain unclear. To investigate, we administered the fibroblast-selective TGF-β1 signaling inhibitor epigallocatechin gallate (EGCG) to interstitial lung disease (ILD) patients undergoing diagnostic lung biopsy and conducted single-cell RNA-Seq on spare tissue. Biopsies from untreated patients showed higher fibroblast TGF-β1 signaling compared with nondisease donor or end-stage ILD tissues. In vivo, EGCG downregulated TGF-β1 signaling and several proinflammatory and stress pathways in biopsy samples. Notably, EGCG reduced fibroblast secreted frizzled-related protein 2 (sFRP2), an unrecognized TGF-β1 fibroblast target gene induced near type II alveolar epithelial cells (AEC2s) in situ. Using AEC2-fibroblast coculture organoids and precision-cut lung slices (PCLSs) from nondiseased donors, we found TGF-β1 signaling promotes a spread AEC2 KRT17+ basaloid state, whereupon sFRP2 then activates a mature cytokeratin 5+ (Krt5+) basal cell program. Wnt-receptor Frizzled 5 (Fzd5) expression and downstream calcineurin signaling were required for sFRP2-induced nuclear NFATc3 accumulation and KRT5 expression. These findings highlight stage-specific TGF-β1 signaling in ILD and the therapeutic potential of EGCG in reducing idiopathic pulmonary fibrosis-related (IPF-related) transcriptional changes and identify TGF-β1/noncanonical Wnt pathway crosstalk via sFRP2 as a mechanism for dysfunctional epithelial signaling in IPF/ILD.