Lung cancer is the leading cause of cancer deaths worldwide1. Mutations in the tumour suppressor gene TP53 occur in 50% of lung adenocarcinomas (LUADs) and are linked to poor prognosis1–4, but how p53 suppresses LUAD development remains enigmatic. We show here that p53 suppresses LUAD by governing cell state, specifically by promoting alveolar type 1 (AT1) differentiation. Using mice that express oncogenic Kras and null, wild-type or hypermorphic Trp53 alleles in alveolar type 2 (AT2) cells, we observed graded effects of p53 on LUAD initiation and progression. RNA sequencing and ATAC sequencing of LUAD cells uncovered a p53-induced AT1 differentiation programme during tumour suppression in vivo through direct DNA binding, chromatin remodelling and induction of genes characteristic of AT1 cells. Single-cell transcriptomics analyses revealed that during LUAD evolution, p53 promotes AT1 differentiation through action in a transitional cell state analogo