Depending on the inflammatory milieu, injury can result either in a tissue's complete regeneration or in its degeneration and fibrosis, the latter of which could potentially lead to permanent organ failure. Yet how inflammatory cells regulate matrix-producing cells involved in the reparative process is unknown. Here we show that in acutely damaged skeletal muscle, sequential interactions between multipotent mesenchymal progenitors and infiltrating inflammatory cells determine the outcome of the reparative process. We found that infiltrating inflammatory macrophages, through their expression of tumor necrosis factor (TNF), directly induce apoptosis of fibro/adipogenic progenitors (FAPs). In states of chronic damage, however, such as those in mdx mice, macrophages express high levels of transforming growth factor β1 (TGF-β1), which prevents the apoptosis of FAPs and induces their differentiation into matrix-producing cells. Treatment with nilotinib, a kinase inhibitor with proposed anti-fibrotic activity, can block the effect of TGF-β1 and reduce muscle fibrosis in mdx mice. Our findings reveal an unexpected anti-fibrotic role of TNF and suggest that disruption of the precisely timed progression from a TNF-rich to a TGF-β−rich environment favors fibrotic degeneration of the muscle during chronic injury.