The aim of this study was to evaluate whether transplantation of Schwann cells derived from bone marrow stromal cells (BMSC-SCs) promotes axonal regeneration and functional recovery in completely transected spinal cord in adult rats. Bone marrow stromal cells (BMSCs) were induced to differentiate into Schwann cells in vitro. A 4-mm segment of rat spinal cord was removed completely at the T7 level. An ultra-filtration membrane tube, filled with a mixture of Matrigel (MG) and BMSC-SCs (BMSC-SC group) or Matrigel alone (MG group), was grafted into the gap. In the BMSC-SC group, the number of neurofilament- and tyrosine hydroxylase-immunoreactive nerve fibers was significantly higher compared to the MG group, although 5-hydroxytryptamine- or calcitonin gene-related peptide-immunoreactive fibers were rarely detectable in both groups. In the BMSC-SC group, significant recovery of the hindlimb function was recognized, which was abolished by retransection of the graft 6 weeks after transplantation. These results demonstrate that transplantation of BMSC-SCs promotes axonal regeneration of lesioned spinal cord, resulting in recovery of hindlimb function in rats. Transplantation of BMSC-SCs is a potentially useful treatment for spinal cord injury.