Severe Acute Respiratory Syndrome Coronavirus-2 (SARS-CoV-2) causes an acute respiratory distress syndrome (ARDS) that resembles surfactant deficient RDS. Using a novel multi-cell type, human induced pluripotent stem cell (hiPSC)-derived lung organoid (LO) system, validated against primary lung cells, we found that inflammatory cytokine/chemokine production and interferon (IFN) responses are dynamically regulated autonomously within the lung following SARS-CoV-2 infection, an intrinsic defense mechanism mediated by surfactant proteins (SP). Single cell RNA sequencing revealed broad infectability of most lung cell types through canonical (ACE2) and non-canonical (endocytotic) viral entry routes. SARS-CoV-2 triggers rapid apoptosis, impairing viral dissemination. In the absence of surfactant protein B (SP-B), resistance to infection was impaired and cytokine/chemokine production and IFN responses were modulated. Exogenous surfactant, recombinant SP-B, or genomic correction of the SP-B deletion restored resistance to SARS-CoV-2 and improved viability.