Skeletal muscle has remarkable regenerative ability after injury. Mesenchymal fibro-adipogenic progenitors (FAPs) are necessary, active participants during this repair process, but the molecular signatures of these cells and their functional relevance remain largely unexplored. Here, using a lineage tracing mouse model (Gli1-CreER Tomato), we demonstrate that Gli1 marks a small subset of muscle-resident FAPs with elevated Hedgehog (Hh) signaling. Upon notexin muscle injury, these cells preferentially and rapidly expanded within FAPs. Ablation of Gli1+ cells using a DTA mouse model drastically reduced fibroblastic colony-forming unit (CFU-F) colonies generated by muscle cells and impaired muscle repair at 28 days. Pharmacologic manipulation revealed that Gli1+ FAPs rely on Hh signaling to increase the size of regenerating myofiber. Sorted Gli1+ FAPs displayed superior clonogenicity and reduced adipogenic differentiation ability in culture compared to sorted Gli1− FAPs. In a glycerol injury model, Gli1+ FAPs were less likely to give rise to muscle adipocytes compared to other FAPs. Further cell ablation and Hh activator/inhibitor treatments demonstrated their dual actions in enhancing myogenesis and reducing adipogenesis after injury. Examining single-cell RNA-sequencing dataset of FAPs from normal mice indicated that Gli1+ FAPs with increased Hh signaling provide trophic signals to myogenic cells while restrict their own adipogenic differentiation. Collectively, our findings identified a subpopulation of FAPs that play an essential role in skeletal muscle repair.