Alveolar type 2 (AT2) cells, the epithelial progenitor cells of the distal lung, are known to be the prominent cell of origin for lung adenocarcinoma. The regulatory programs that control chromatin and gene expression in AT2 cells during the early stages of tumor initiation are not well understood. Here, we dissected the response of AT2 cells to Kras activation and p53 loss (KP) using combined single cell RNA and ATAC sequencing in an established tumor organoid system. Multi-omic analysis showed that KP tumor organoid cells exhibit two major cellular states: one more closely resembling AT2 cells (SPC-high) and another with loss of AT2 identity (hereafter, Hmga2-high). These cell states are characterized by unique transcription factor (TF) networks, with SPC-high states associated with TFs known to regulate AT2 cell fate during development and homeostasis, and distinct TFs associated with the Hmga2-high state. CD44 was identified as a marker of the Hmga2-high state, and was used to separate organoid cultures for functional comparison of these two cell states. Organoid assays and orthotopic transplantation studies indicated that SPC-high cells have higher tumorigenic capacity in the lung microenvironment compared to Hmga2-high cells. These findings highlight the utility of understanding chromatin regulation in the early oncogenic versions of epithelial cells, which may reveal more effective means to intervene the progression of Kras-driven lung cancer.