The liver and pancreas originate from overlapping embryonic regions, and single-cell lineage tracing in zebrafish has shown that Bone morphogenetic protein 2b (Bmp2b) signaling is essential for determining the fate of bipotential hepatopancreatic progenitors towards the liver or pancreas. Despite its pivotal role, the gene regulatory networks functioning downstream of Bmp2b signaling in this process are poorly understood. We have identified four and a half LIM domains 1b (fhl1b), which is primarily expressed in the prospective liver anlage, as a novel target of Bmp2b signaling. fhl1b depletion compromised liver specification and enhanced induction of pancreatic cells from endodermal progenitors. Conversely, overexpression of fhl1b favored liver specification and inhibited induction of pancreatic cells. By single-cell lineage tracing, we showed that fhl1b depletion led lateral endodermal cells, destined to become liver cells, to become pancreatic cells. Reversely, when fhl1b was overexpressed, medially located endodermal cells, fated to differentiate into pancreatic and intestinal cells, contributed to the liver by directly or indirectly modulating the discrete levels of pdx1 expression in endodermal progenitors. Moreover, loss of fhl1b increased the regenerative capacity of β-cells by increasing pdx1 and neurod expression in the hepatopancreatic ductal system. Altogether, these data reveal novel and critical functions of Fhl1b in the hepatic versus pancreatic fate decision and in β-cell regeneration.