Although recent evidence demonstrates heterogeneity among CD8+ T cells during chronic infection, developmental relationships and mechanisms underlying their fate decisions remain incompletely understood. Using single-cell RNA and TCR sequencing, we traced the clonal expansion and differentiation of CD8+ T cells during chronic LCMV infection. We identified immense clonal and phenotypic diversity, including a subset termed intermediate cells. Trajectory analyses and infection models showed intermediate cells arise from progenitor cells before bifurcating into terminal effector and exhausted subsets. Genetic ablation experiments identified that type I IFN drives exhaustion through an IRF7-dependent mechanism, possibly through an IFN-stimulated subset bridging progenitor and exhausted cells. Conversely, Zeb2 was critical for generating effector cells. Intriguingly, some T cell clones exhibited lineage bias. Mechanistically, we identified that TCR avidity correlates with an exhausted fate, whereas SHP-1 selectively restricts low-avidity effector cell accumulation. Thus, our work elucidates novel mechanisms underlying CD8+ T cell fate determination during persistent infection and suggests two potential pathways leading to exhaustion.