Inflammation, following injury, induces cellular plasticity as an inherent component of physiological tissue repair. The dominant fate of wound macrophages is unclear and debated. Here we show that two-thirds of all granulation tissue fibroblasts, otherwise known to be of mesenchymal origin, are derived from myeloid cells which are likely to be wound macrophages. Conversion of myeloid to fibroblast-like cells is impaired in diabetic wounds. In cross-talk between keratinocytes and myeloid cells, miR-21 packaged in extracellular vesicles (EV) is required for cell conversion. EV from wound fluid of healing chronic wound patients is rich in miR-21 and causes cell conversion more effectively compared to that by fluid from non-healing patients. Impaired conversion in diabetic wound tissue is rescued by targeted nanoparticle-based delivery of miR-21 to macrophages. This work introduces a paradigm wherein myeloid cells are recognized as a major source of fibroblast-like cells in the granulation tissue.