Muscle loss due to fibrotic or adipogenic replacement of myofibers is common in muscle diseases and muscle-resident fibro/adipogenic precursors (FAPs) are implicated in this process. While FAP-mediated muscle fibrosis is widely studied in muscle diseases, the role of FAPs in adipogenic muscle loss is not well understood. Adipogenic muscle loss is a feature of limb girdle muscular dystrophy 2B (LGMD2B) – a disease caused by mutations in dysferlin. Here we show that FAPs cause the adipogenic loss of dysferlin deficient muscle. Progressive accumulation of Annexin A2 (AnxA2) in the myofiber matrix causes FAP differentiation into adipocytes. Lack of AnxA2 prevents FAP adipogenesis, protecting against adipogenic loss of dysferlinopathic muscle while exogenous AnxA2 enhances muscle loss. Pharmacological inhibition of FAP adipogenesis arrests adipogenic replacement and degeneration of dysferlin-deficient muscle. These results demonstrate the pathogenic role of FAPs in LGMD2B and establish these cells as therapeutic targets to ameliorate muscle loss in patients.