Dermal papilla cells (DPCs) show phenotypic plasticity during wound healing. The multipotency of DPCs is well recognized, but the signaling pathways that regulate the differentiation of these cells into fibroblasts are poorly understood. A preliminary experiment showed that transforming growth factor beta1 (TGF-β1) can induce DPCs to differentiate into fibroblast-like cells, which suggests that DPCs may be a source of wound-healing fibroblasts. Bone morphogenetic protein-7 (BMP-7), a member of the TGF-β superfamily, can prevent and reverse fibrosis by counteracting the TGF-β1–mediated profibrotic effect. To determine whether BMP-7 attenuates the TGF-β1–induced differentiation of DPCs into fibroblasts, we established an in vitro system for DPC differentiation and recorded the gene expression patterns that distinguished DPCs from fibroblasts. The proportion of fibroblast-like cells was significantly enhanced in DPCs treated with TGF-β1, as evidenced by immunocytochemistry, flow cytometry, quantitative real-time reverse transcriptase polymerase chain reaction, and Western blot analysis. BMP-7 and TGF-β1 administration substantially decreased fibroblast-like differentiation, indicating inhibition of TGF-β1–induced differentiation. The antagonistic BMP-7– and TGF-β1–activated signaling pathways can be used to promote wound healing or suppress hypertrophic scarring.