Cells can change identity during normal development, in response to tissue damage or defined artificial treatments, or during disease processes such as cancer. Strikingly, not only the reprogramming of tissue cells to an embryonic stem cell-like state, but also the direct conversion from one cell type to another have been described. Direct cell type conversion could represent an alternative strategy for cellular therapies. However, little is known about the actual cellular steps undertaken by a cell as it changes its identity and their possible consequences for the organism. Using an in vivo single-cell system of natural direct reprogramming, in which a C. elegans rectal cell transforms into a motoneuron, we present an in-depth analysis of the cellular transformations involved. We found that the reprogrammed cell transits through intermediate states during direct in vivo reprogramming. We identified and characterised a mutant in the conserved COE transcription factor UNC-3 in which this cellular transformation is blocked. We determined that complete erasure of initial identity first takes place, followed by stepwise, unc-3-dependent, redifferentiation into a motoneuron. Furthermore, unlike in vitro induced reprogramming, reversion to a dedifferentiated identity does not lead to an increase in cellular potential in a natural, in vivo context. Our findings suggest that direct cell type conversion occurs via successive steps, and that dedifferentiation can occur in the absence of cell division. Furthermore, our results suggest that mechanisms are in place in vivo to restrict cell potential during reprogramming, a finding with important implications for regenerative medicine.