Tissue fibrosis is a major cause of organ dysfunction. Preventing fibrosis in tissue pathological condition remains a significant clinical challenge. Here we investigate the role of fibroblast growth factor 7 (FGF7) in mitigating fibrosis and promoting regeneration of load-bearing tendons. Fgf7 knockout mice exhibit impaired motor function and disordered matrix assembly in tendons. Single-cell RNA sequencing reveals an enrichment of a pro-fibrotic cell subpopulation in Fgf7-deficient tendons, which is also predominant in human tendinopathy. Using ProTracer technology, we find that FGF7 deficiency drives proliferating cells toward this pro-fibrotic lineage. Furthermore, we find that FGF7 promotes the tenogenic differentiation of tendon stem/progenitor cells while suppressing their fibrotic differentiation. Importantly, a hydrogel loaded with recombinant FGF7 effectively reduces fibrosis and significantly promotes functional tendon regeneration in vivo. These findings elucidate FGF7’s dual role in driving tenogenesis and inhibiting fibrosis, suggesting a potential therapeutic strategy.