To date, the cell and molecular mechanisms regulating tendon healing are poorly understood. Here, we establish a novel model of tendon regeneration using neonatal mice and show that neonates heal via formation of a 'neo-tendon' that differentiates along the tendon specific lineage with functional restoration of gait and mechanical properties. In contrast, adults heal via fibrovascular scar, aberrant differentiation toward cartilage and bone, with persistently impaired function. Lineage tracing identified intrinsic recruitment of Scx-lineage cells as a key cellular mechanism of neonatal healing that is absent in adults. Instead, adult Scx-lineage tenocytes are not recruited into the defect but transdifferentiate into ectopic cartilage; in the absence of tenogenic cells, extrinsic αSMA-expressing cells persist to form a permanent scar. Collectively, these results establish an exciting model of tendon regeneration and uncover a novel cellular mechanism underlying regenerative vs non-regenerative tendon healing.