Individuals with progressive liver failure are at a high risk of mortality without liver transplantation. However, our understanding of derailed regenerative responses in failing livers is limited. Here, we performed comprehensive multi-omic profiling of healthy and diseased human livers using bulk and single-nucleus RNA- plus ATAC-seq. We report that hepatic immune milieu alterations in alcohol-associated liver disease (ALD) prevent hepatocytes from transitioning to a proliferative progenitor-like state, trapping them into an unproductive intermediate state. We discovered striking changes in RNA binding protein (RBP) expression, particularly ESRP, PTBP, and SR families, that cause misregulation of developmentally controlled RNA splicing in ALD. Our data pinpoint ESRP2 as a pivotal disease-sensitive RBP and support a causal role of its deficiency in ALD pathogenesis. Notably, splicing defects in ESRP2-targets Tcf4 and Slk, amongst others, directly alter their nuclear localization and activities, disrupting WNT and Hippo signaling pathways, which are critical for normal liver regeneration. We demonstrate that changes in stromal cell populations enrich failing ALD livers with TGF-b, which suppresses ESRP2-driven epithelial splicing program and replaces functional parenchyma with quasi-progenitor-like cells lacking liver-specific functions. This unprecedented account of transcriptional and post-transcriptional dysregulation in ALD suggests that targeting misspliced RNAs could improve recovery and serve as biomarkers for poor ALD outcomes.