Bronchopulmonary dysplasia (BPD), a chronic lung disease, is the most common major complication of preterm birth. Supplemental oxygen administration, while lifesaving in the neonatal period, remains a key determinant of BPD pathophysiology. Exposure of the immature lung to increased levels of oxygen elicits an inflammatory response resulting in abnormal lung development. However, not every premature infant is equally sensitive to develop BPD. Using genetically diverse mouse strains, we show that the innate immune response activated in the lungs of mice sensitive to hyperoxia that develop BPD-like lung injury differs from mice resilient to disease. Specifically, we identified a selective upregulation of triggering receptor expressed on myeloid cells 2 (TREM2) on lung macrophages and monocytes in the hyperoxia-sensitive C57BL/6J mouse strain. We show that loss of function of TREM2 signaling in myeloid cells resulted in a dramatically improved phenotype after neonatal hyperoxia exposure characterized by a dampened immune response, preserved alveolar structure, and preserved cell proliferative potential supporting normal lung development. At the molecular level, inhibition of TREM2 signaling dampened the magnitude of p53 activation and resulted in cell cycle arrest instead of apoptosis. These findings show that TREM2 is a critical regulator of the pathogenic innate immune response to hyperoxia and highlight its importance as a potential therapeutic target for mitigating injury in the hyperoxia-exposed developing lung.