The purpose of this study was to investigate the in vivo vascularization and bone formation activity of tissue-engineered bone constructed using bone marrow mesenchymal stem cells (MSCs) transfected with vascular endothelial growth factor (VEGF). The expression of VEGF165 in rat bone marrow MSCs was confirmed using RT-PCR and immunohistochemistry. The MSCs were cultured together with nano-hydroxyapatite/collagen (NHAC) to form tissue-engineered bone. Untransfected MSCs were used as controls. The mice were sacrificed, and the bone xenografts were analyzed using immunohistochemistry and quantified for the degree of vascularization and new bone formation. Based on our results, expression of the VEGF165 gene was detected using RT-PCR and immunohistochemistry following transfection and 4 weeks of selection. The co-cultured NHAC- and VEGF-transfected MSCs had significantly higher alkaline phosphatase (AP) activity compared to the controls (P<0.05). In the mice that received the tissue-engineered bone xenografts, clumps of cartilage cells, irregular bone-like tissue and microvessels were observed. The growth of these structures progressed with time. In the control mice, however, only small amounts of bone-like and fibrotic tissue were observed. The differences between the control and experimental groups were statistically significant (P<0.05). In conclusion, VEGF165‑transfected bone marrow MSCs promotes vascularization of tissue-engineered bone and ectopic osteogenesis.