Jaagsiekte sheep retrovirus (JSRV) is a unique oncogenic virus with distinctive biological properties. JSRV is the only virus causing a naturally occurring lung cancer (ovine pulmonary adenocarcinoma, OPA) and possessing a major structural protein that functions as a dominant oncoprotein. Lung cancer is the major cause of death among cancer patients. OPA can be an extremely useful animal model in order to identify the cells originating lung adenocarcinoma and to study the early events of pulmonary carcinogenesis. In this study, we demonstrated that lung adenocarcinoma in sheep originates from infection and transformation of proliferating type 2 pneumocytes (termed here lung alveolar proliferating cells, LAPCs). We excluded that OPA originates from a bronchioalveolar stem cell, or from mature post-mitotic type 2 pneumocytes or from either proliferating or non-proliferating Clara cells. We show that young animals possess abundant LAPCs and are highly susceptible to JSRV infection and transformation. On the contrary, healthy adult sheep, which are normally resistant to experimental OPA induction, exhibit a relatively low number of LAPCs and are resistant to JSRV infection of the respiratory epithelium. Importantly, induction of lung injury increased dramatically the number of LAPCs in adult sheep and rendered these animals fully susceptible to JSRV infection and transformation. Furthermore, we show that JSRV preferentially infects actively dividing cell in vitro. Overall, our study provides unique insights into pulmonary biology and carcinogenesis and suggests that JSRV and its host have reached an evolutionary equilibrium in which productive infection (and transformation) can occur only in cells that are scarce for most of the lifespan of the sheep. Our data also indicate that, at least in this model, inflammation can predispose to retroviral infection and cancer.