Despite their importance in tissue maintenance and repair, fibroblast diversity and plasticity are poorly understood. Using single-cell RNA sequencing, we uncover six distinct sclerotome-derived fibroblast populations in the zebrafish trunk, including progenitor-like perivascular/interstitial fibroblasts, and specialized fibroblasts such as tenocytes. To determine fibroblast plasticity in vivo, we develop a tendon regeneration model. Lineage tracing reveals that laser-ablated tenocytes can be quickly regenerated by pre-existing fibroblasts. Combining live imaging and clonal analysis, we demonstrate that perivascular/interstitial fibroblasts actively migrate to the injury site, where they proliferate and give rise to new tenocytes. Strikingly, other specialized fibroblast subtypes derived from the same sclerotome lineage, including uninjured tenocytes, show no regenerative response. Interestingly, active Hedgehog (Hh) signaling is required for the proliferation and differentiation of activated fibroblasts. Together, our work highlights the functional diversity of fibroblasts and establishes perivascular/interstitial fibroblasts as tenocyte progenitors that promote tendon regeneration in a Hh signaling-dependent manner.