During skin wound healing, fibroblast-like cells reconstitute the dermal compartment of the repaired skin filling the wound gap. A subset of these cells are transcriptionally active for β-catenin/T-cell factor (TCF) signaling during the proliferative phase of the repair process, and β-catenin levels control the size of the scar that ultimately forms by regulating the number of dermal fibroblasts. Here, we performed cell lineage studies to reveal a source of the dermal cells in which β-catenin signaling is activated during wound repair. Using a reporter mouse, we found that cells in the early wound in which TCF-dependent transcription is activated express genes involved in muscle development. Using mice in which cells express Pax7 (muscle progenitors) or Mck (differentiated myocytes) are permanently labeled, we showed that one quarter of dermal cells in the healing wound are Pax7 expressing progeny, but none are Mck progeny. Removing one allele of β-catenin in Pax7 expressing progeny resulted in a significantly smaller scar size with fewer Pax7 expressing progeny cell contributing to wound repair. During wound healing, β-catenin activation causes muscle satellite cells to adopt a fibrotic phenotype and this is a source of dermal cells in the repair process.