The identification of lymphocyte subsets with non-overlapping effector functions has been pivotal to the development of targeted therapies in immune-mediated inflammatory diseases (IMIDs)1,2. However, it remains unclear whether fibroblast subclasses with non-overlapping functions also exist and are responsible for the wide variety of tissue-driven processes observed in IMIDs, such as inflammation and damage3-5. Here we identify and describe the biology of distinct subsets of fibroblasts responsible for mediating either inflammation or tissue damage in arthritis. We show that deletion of fibroblast activation protein-α (FAPα)+ fibroblasts suppressed both inflammation and bone erosions in mouse models of resolving and persistent arthritis. Single-cell transcriptional analysis identified two distinct fibroblast subsets within the FAPα+ population: FAPα+THY1+ immune effector fibroblasts located in the synovial sub-lining, and FAPα+THY1- destructive fibroblasts restricted to the synovial lining layer. When adoptively transferred into the joint, FAPα+THY1- fibroblasts selectively mediate bone and cartilage damage with little effect on inflammation, whereas transfer of FAPα+ THY1+ fibroblasts resulted in a more severe and persistent inflammatory arthritis, with minimal effect on bone and cartilage. Our findings describing anatomically discrete, functionally distinct fibroblast subsets with non-overlapping functions have important implications for cell-based therapies aimed at modulating inflammation and tissue damage.