Although the lung can undergo self-repair after injury, fibrosis in chronically injured or diseased lungs can occur at the expense of regeneration. Here we study how a hematopoietic-vascular niche regulates alveolar repair and lung fibrosis. Using intratracheal injection of bleomycin or hydrochloric acid in mice, we show that repetitive lung injury activates pulmonary capillary endothelial cells (PCECs) and perivascular macrophages, impeding alveolar repair and promoting fibrosis. Whereas the chemokine receptor CXCR7, expressed on PCECs, acts to prevent epithelial damage and ameliorate fibrosis after a single round of treatment with bleomycin or hydrochloric acid, repeated injury leads to suppression of CXCR7 expression and recruitment of vascular endothelial growth factor receptor 1 (VEGFR1)-expressing perivascular macrophages. This recruitment stimulates Wnt/β-catenin–dependent persistent upregulation of the Notch ligand Jagged1 (encoded by Jag1) in PCECs, which in turn stimulates exuberant Notch signaling in perivascular fibroblasts and enhances fibrosis. Administration of a CXCR7 agonist or PCEC-targeted Jag1 shRNA after lung injury promotes alveolar repair and reduces fibrosis. Thus, targeting of a maladapted hematopoietic-vascular niche, in which macrophages, PCECs and perivascular fibroblasts interact, may help to develop therapy to spur lung regeneration and alleviate fibrosis.