During limb regeneration adult tissue is converted into a zone of undifferentiated progenitors called the blastema that reforms the diverse tissues of the limb. Previous experiments have led to wide acceptance that limb tissues dedifferentiate to form pluripotent cells. Here we have reexamined this question using an integrated GFP transgene to track the major limb tissues during limb regeneration in the salamander Ambystoma mexicanum (the axolotl). Surprisingly, we find that each tissue produces progenitor cells with restricted potential. Therefore, the blastema is a heterogeneous collection of restricted progenitor cells. On the basis of these findings, we further demonstrate that positional identity is a cell-type-specific property of blastema cells, in which cartilage-derived blastema cells harbour positional identity but Schwann-derived cells do not. Our results show that the complex phenomenon of limb regeneration can be achieved without complete dedifferentiation to a pluripotent state, a conclusion with important implications for regenerative medicine.