Appendage regeneration in salamanders and fish occurs through formation and maintenance of a mass of progenitor tissue called the blastema. A dedicated epidermis overlays the blastema and is required for its proliferation and patterning, yet this interaction is poorly understood. Here, we identified molecularly and functionally distinct compartments within the basal epidermal layer during zebrafish fin regeneration. Proximal epidermal subtypes express the transcription factor lef1 and the blastemal mitogen shh, while distal subtypes express the Fgf target gene pea3 and wnt5b, an inhibitor of blastemal proliferation. Ectopic overexpression of wnt5b reduced shh expression, while pharmacologic introduction of a Hh pathway agonist partially rescued blastemal proliferation during wnt5b overexpression. Loss- and gain-of-function approaches indicate that Fgf signaling promotes shh expression in proximal epidermis, while Fgf/Ras signaling restricts shh expression from distal epidermis through induction of pea3 expression and maintenance of wnt5b. Thus, the fin wound epidermis spatially confines Hh signaling through the activity of Fgf and Wnt pathways, impacting blastemal proliferation during regenerative outgrowth.