SUMMARY Fibroblasts are the most common cell type found in connective tissues, known to play major roles in development, homeostasis, regeneration and disease. Although specific fibroblast subpopulations were associated with different biological processes, the mechanisms and unique activities underlying their diversity has not been thoroughly examined. Turning to skeletal muscle development, we set to dissect the variation of muscle-resident fibroblasts (mrFibroblasts). Our results demonstrate mrFibroblasts diversify following the transition from embryonic to fetal myogenesis prior to birth. We find mrFibroblast segregate into two major subpopulations occupying distinct niches, with interstitial fibroblasts residing between the muscle fibers, and delineating fibroblasts sheathing the muscle mass. We further show these subpopulations entail distinct cellular dynamics and transcriptomes. Notably, we find mrFibroblast subpopulations exert distinct regulatory roles on myoblast proliferation and differentiation. Finally, we demonstrate this diversification depends on muscle contraction. Altogether, these findings establish mrFibroblast diversify in a spatio-temporal embryonic process into distinct cell types, entailing different characteristics and roles.