Background Cigarette smoke (CS) is a highly complex mixture and many of its components are known carcinogens, mutagens, and other toxic substances. CS induces oxidative stress and cell death, and this cell toxicity plays a key role in the pathogenesis of several pulmonary diseases. Methodology/Principal Findings We studied the effect of cigarette smoke extract (CSE) in human alveolar epithelial type I-like (ATI-like) cells. These are isolated type II cells that are differentiating toward the type I cell phenotype in vitro and have lost many type II cell markers and express type I cell markers. ATI-like cells were more sensitive to CSE than alveolar type II cells, which maintained their differentiated phenotype in vitro. We observed disruption of mitochondrial membrane potential, apoptosis and necrosis that were detected by double staining with acridine orange and ethidium bromide or Hoechst 33342 and propidium iodide and TUNEL assay after treatment with CSE. We also detected caspase 3 and caspase 7 activities and lipid peroxidation. CSE induced nuclear translocation of Nrf2 and increased expression of Nrf2, HO-1, Hsp70 and Fra1. Moreover, we found that Nrf2 knockdown sensitized ATI-like cells to CSE and Nrf2 overexpression provided protection against CSE-induced cell death. We also observed that two antioxidant compounds N-acetylcysteine and trolox protected ATI-like cells against injury by CSE. Conclusions Our study indicates that Nrf2 activation is a major factor in cellular defense of the human alveolar epithelium against CSE-induced toxicity and oxidative stress. Therefore, antioxidant agents that modulate Nrf2 would be expected to restore antioxidant and detoxifying enzymes and to prevent CS-related lung injury and perhaps lessen the development of emphysema.