The mammalian skeleton performs a diverse range of vital functions, requiring mechanisms of regeneration that restore functional skeletal cell populations after injury. We hypothesized that the Wnt pathway specifies distinct functional subsets of skeletal cell types, and that lineage tracing of Wnt-responding cells (WRCs) using the Axin2 gene in mice identifies a population of long-lived skeletal cells on the periosteum of long bone. Ablation of these WRCs disrupts healing after injury, and three-dimensional finite element modeling of the regenerate delineates their essential role in functional bone regeneration. These progenitor cells in the periosteum are activated upon injury and give rise to both cartilage and bone. Indeed, our findings suggest that WRCs may serve as a therapeutic target in the setting of impaired skeletal regeneration.