Alveoli in lungs are internally lined by

Alveoli are lined by simple squamous epithelium.

The diffusion membrane is made up of three major layers namely, the thin squamous epithelium of alveoli, the endothelium of alveolar capillaries and the basement substance (composed of a thin basement membrane supporting the squamous epithelium and the basement membrane surrounding the single layer endothelial
cells of capillaries) in between them.