Neural stem cells (NSCs) differentiate into endothelial cells (ECs) and neuronal cells. Estradiol (E2) is known to exhibit proangiogenic effects on ischemic tissues via EC activation. Therefore, we hypothesized that E2 can promote the therapeutic potential of NSC transplantation for injured nerve repair via the differentiation of NSCs into ECs during neovascularization. NSCs isolated from newborn mouse brains were transplanted into injured sciatic nerves with (NSC/E2 group) or without E2-conjugated gelatin hydrogel (E2 group). The NSC/E2 group exhibited the greatest recovery in motor nerve conduction velocity, voltage amplitude, and exercise tolerance. Histological analyses revealed increased intraneural vascularity and blood perfusion as well as striking NSC recruitment to the neovasculature in the injured nerves in the NSC/E2 group. In vitro, E2 enhanced the NSC migration and proliferation inhibiting apoptosis. Fluorescence-activated cell sorting analysis also revealed that E2 significantly increased the percentage of CD31 in NSCs, and the effect of E2 was completely neutralized by the estrogen receptor antagonist ICI. The combination of E2 administration and NSC transplantation cooperatively improved the functional recovery of injured peripheral nerves, at least in part, via E2-associated NSC differentiation into ECs. These findings provide a novel mechanistic insight into both NSC biology and the biological effects of endogenous E2.