A major challenge of regenerative medicine is to coax therapeutic stem cells to restore both form and function to injured tissues and organs. Zebrafish provide a vertebrate model that impeccably regenerates lost or damaged tissue by innate mechanisms that precisely control the proliferation, differentiation, and position of injury-induced progenitor cells. For example, Hedgehog/Smoothened (Hh/Smo) signaling in progenitor osteoblasts (pObs) is implicated in the re-establishment of stereotypically branched ossified rays during fin regeneration. Using a photoconvertible patched2 reporter line, we resolve active Hh/Smo output to a narrow distal fin regenerate zone comprising pObs and neighboring migratory basal epidermal cells. Hh/Smo activity is driven by epidermal Sonic hedgehog a (Shha) rather than pOb-derived Indian hedgehog a (Ihha), which instead uses non-canonical signaling to support bone maturation. Using high-resolution imaging and BMS-833923, a uniquely effective Smo inhibitor, we show that Shha/Smo promotes fin ray branching by escorting pObs into split groups that mirror transiently divided clusters of Shha-expressing epidermis. Epidermal cellular protrusions directly contact pObs only where an otherwise occluding Laminin B1A-containing basement membrane remains incompletely assembled. These intimate interactions coupled with epidermal movements progressively generate physically separated pOb pools that then continue regenerating independently to collectively form a now branched bony ray.