The most common mechanism by which ammonia gas causes damage occurs when anhydrous ammonia (liquid or gas) reacts with tissue water to form the strongly alkaline solution, ammonium hydroxide.
NH3 + H2 O ⇒ NH4 OH
This reaction is exothermic and capable of causing significant thermal injury.
Ammonium hydroxide can cause severe alkaline chemical burns to skin, eyes, and especially the respiratory system. Mild exposures primarily affect the upper respiratory tract, while more severe exposures tend to affect the entire respiratory system. The gastrointestinal tract also may be affected if ammonia is ingested.
Tissue damage from alkali is caused by liquefaction necrosis and theoretically can penetrate deeper than that caused by an equipotent acid. In the case of ammonium hydroxide, the tissue breakdown liberates water, thus perpetuating the conversion of ammonia to ammonium hydroxide. In the respiratory tract, this results in the destruction of cilia and the mucosal barrier to infection. Furthermore, secretions, sloughed epithelium, cellular debris, edema, and reactive smooth muscle contraction cause significant airway obstruction.
Airway epithelium can regain barrier integrity within 6 hours following exposure if the basal cell layer remains intact. However, damaged epithelium often is replaced by granular tissue, which may be one of the etiologies leading to chronic lung disease following ammonia inhalation injury.
More at: http://emedicine.medscape.com/article/820298-overview#a0104