In IEEE 802.11 WLANs, packet losses may be due to buffer overflow, transmission errors, or collisions. Therefore, the performance of TCP-Friendly Rate Control (TFRC) in IEEE 802.11 WLANs largely depends on its ability to differentiate packet losses resulting from network congestion (due to buffer overflow and collisions) and those from transmission errors. In this paper, an enhanced TFRC (E-TFRC) protocol is proposed to detect and identify the cause of packet loss events through a novel two-phase loss differentiation algorithm (TP-LDA). The packet losses due to buffer overflow and those due to failed transmissions in WLANs are first differentiated. For failed transmissions, the fraction of those due to collisions is obtained with the assistance of the lower layer. By employing TP-LDA, only the packet losses due to buffer overflow and collisions are notified to the sender for appropriate flow and congestion control. To quantify the performance of TFRC and E-TFRC over WLANs, a continuous-time Markov chain based on a new WLAN link model is developed by considering both collisions and transmission errors. Analytical and simulation results demonstrate that, with appropriate loss differentiation, E-TFRC can achieve higher throughput than TFRC in WLANs with different channel profiles.