During infection with respiratory viruses, destruction of the lung epithelium is due to cytopathic viral effects in host cells, and damage generated by the ensuing inflammatory immune response. Host response pathways that protect or exacerbate lung tissue damage are not fully understood, particularly with regard to the impact on lung regeneration during recovery from disease. Type I (IFN-α and IFN-β) and III (IFN-λ) interferons are host-produced cytokines exerting pleiotropic antiviral, antiproliferative, and immunomodulatory effects in target cells. Here, we examine the effects of type I and III IFN on lung repair during recovery from influenza. We show that IFN signalling specifically induced in respiratory epithelial cells disrupts epithelial proliferation and differentiation during lung repair. IFN-λ drives these effects most potently, activating p53-dependent cell cycle arrest. Disruption of lung repair processes results in exacerbated lung tissue damage, compromised protective barrier function, and increased susceptibility to bacterial superinfections. Owing to the pathogenic potential of aberrant host immune responses, including IFNs, these pathways require tight regulation by host factors to limit tissue damage. This includes the environmental sensor aryl hydrocarbon receptor (AHR), which has been shown to enhance barrier immunity, promote disease tolerance, and suppress IFN production during viral infection. Using genetic models to increase the availability of natural AHR ligands, we show that the AHR induces signals in lung barrier tissues to reduce pulmonary damage and dampen inflammation. Tissue-protective pathways induced by the AHR appear to occur independently from AHR-dependent regulation of IFN production. Taken together, our data highlights the importance of timing and regulation in generating protective antiviral immunity and lung barrier protection, in order to prevent the development of pathogenic, tissue-damaging responses.