Research in the past three decades has identified key mediators and signaling mechanisms responsible for myofibroblastic transdifferentiation (MTD) of hepatic stellate cells (HSC), the pivotal event in liver fibrogenesis. Yet, fundamental understanding of the MTD from the viewpoint of cell fate or lineage regulation has been elusive. Recent studies using genetic cell fate mapping techniques demonstrate HSC are derived from mesoderm and at least in part via septum transversum and mesothelium. HSC express markers for different cell types derived from multipotent mesenchymal progenitors. A regulatory commonality between differentiation of adipocytes and that of HSC is shown, and a shift from adipogenic to myogenic or neuronal phenotype characterizes HSC MTD. Central to this shift is a loss of expression of the master adipogenic regulator peroxisome proliferator activated receptor-γ (PPAR-γ). Restored expression of PPAR-γ and/or other adipogenic transcription factors reverses myofibroblastic HSC to differentiated cells. In MTD, Pparγ is epigenetically repressed by induction of methyl-CpG binding protein 2 and its enrichment to the promoter and polycomb repressive complex-facilitated histone H3 lysine 27 di/tri-methylation at the 3′ exons. Blocking canonical wingless-related MMTV integration site (Wnt) signaling in myofibroblastic HSC with the co-receptor antagonist Dickkopf-1, abrogates these epigenetic mechanisms, restores PPAR-γ expression and HSC differentiation. Necdin, a melanoma antigen family protein, is identified as an upstream mediator for induction of the canonical Wnt10b and consequent Pparγ repression and HSC MTD. The identified morphogen-induced epigenetic regulation of Pparγ and HSC fate may serve as a novel target for manipulation of liver fibrosis and mesenchymal–epithelial interactions in liver regeneration.