Influenza A virus (IAV)‐induced severe disease is characterized by infected lung epithelia, robust inflammatory responses and acute lung injury. Since type I interferon (IFNαβ) and type III interferon (IFNλ) are potent antiviral cytokines with immunomodulatory potential, we assessed their efficacy as IAV treatments. IFNλ treatment of IAV‐infected Mx1‐positive mice lowered viral load and protected from disease. IFNα treatment also restricted IAV replication but exacerbated disease. IFNα treatment increased pulmonary proinflammatory cytokine secretion, innate cell recruitment and epithelial cell death, unlike IFNλ‐treatment. IFNλ lacked the direct stimulatory activity of IFNα on immune cells. In epithelia, both IFNs induced antiviral genes but no inflammatory cytokines. Similarly, human airway epithelia responded to both IFNα and IFNλ by induction of antiviral genes but not of cytokines, while hPBMCs responded only to IFNα. The restriction of both IFNλ responsiveness and productive IAV replication to pulmonary epithelia allows IFNλ to limit IAV spread through antiviral gene induction in relevant cells without overstimulating the immune system and driving immunopathology. We propose IFNλ as a non‐inflammatory and hence superior treatment option for human IAV infection.