Lung adenocarcinoma (LUAD), commonly driven by KRAS mutations, is responsible for 7% of all cancer mortality. The first allele-specific KRAS inhibitors were recently approved in LUAD, but clinical benefit is limited by intrinsic and acquired resistance. LUAD predominantly arises from alveolar type 2 (AT2) cells, which function as facultative alveolar stem cells by self-renewing and replacing alveolar type 1 (AT1) cells. Using genetically engineered mouse models, patient-derived xenografts, and patient samples we found inhibition of KRAS promotes transition to a quiescent AT1-like cancer cell state in LUAD tumors. Similarly, suppressing Kras induced AT1 differentiation of wild-type AT2 cells upon lung injury. The AT1-like LUAD cells exhibited high growth and differentiation potential upon treatment cessation, whereas ablation of the AT1-like cells robustly improved treatment response to KRAS inhibitors. Our results uncover an unexpected role for KRAS in promoting intra-tumoral heterogeneity and suggest targeting alveolar differentiation may augment KRAS-targeted therapies in LUAD.