Fibroblasts are activated to repair the heart following injury. Fibroblast activation in the mammalian heart leads to a permanent fibrotic scar that impairs cardiac function. In other organisms, like zebrafish, cardiac injury is followed by transient fibrosis and scar-free regeneration. The mechanisms that drive scarring versus scar-free regeneration are not well understood. Here we show that the homeo-box containing transcription factor Prrx1b is required for scar-free regeneration of the zebrafish heart as the loss of Prrx1b results in excessive fibrosis and impaired cardiomyocyte proliferation. Through lineage tracing and single-cell RNA-sequencing we find that Prrx1b is activated in epicardial-derived cells (EPDCs) where it restricts TGF-β ligand expression and collagen production. Furthermore, through combined in vitro experiments in human fetal EPDCs and in vivo rescue experiments in zebrafish, we conclude that Prrx1 stimulates Nrg1 expression and promotes cardiomyocyte proliferation. Collectively, these results indicate that Prrx1 is a key transcription factor that balances fibrosis and regeneration in the injured zebrafish heart.