Absence of a specialized wound epidermis is hypothesized to block limb regeneration in higher vertebrates. However, the factors preventing its formation in regeneration-incompetent animals are poorly understood. To characterize the endogenous molecular and cellular regulators of specialized wound epidermis formation in Xenopus laevis tadpoles, and the loss of their regeneration competency during development, we used single-cell transcriptomics and ex vivo regenerating limb cultures. Transcriptomic analysis revealed that the specialized wound epidermis is not a novel cell state, but a re-deployment of the apical-ectodermal-ridge (AER) programme underlying limb development. Enrichment of secreted inhibitory factors, including Noggin, a morphogen expressed in developing cartilage/bone progenitor cells, are identified as key inhibitors of AER cell formation in regeneration-incompetent tadpoles. These factors can be overridden by Fgf10, which operates upstream of Noggin and blocks chondrogenesis. These results indicate that manipulation of the extracellular environment and/or chondrogenesis may provide a strategy to restore regeneration potential in higher vertebrates.