Mesenchymal stem cells have become a very attractive source of cell implantation for neural tissue engineering. The ideal stem cells for transplantation should be easily obtained, and should rapidly proliferate in vitro and have low immunogenicity. The purpose of this study was to investigate the regenerative potential of adipose-derived stem cells (ADSC) on peripheral nerve repair. ADSCs were isolated from rat adipose tissue and cultured until adherent cells became morphologically homogeneous with a fibroblast-like shape, and transplanted with acellular nerve allografts (ANAs) into rat models with a 10 mm gap of transected sciatic nerve defect. After cell transplantation, we found that ADSC implantation improved functional recovery of exercise behavior and increased wet weight ratio of the anterior tibial muscle. In the electrophysiological testing, we found that the percentage of activated fibers was higher in the ADSC-implanted animals as evidenced by the increase of nerve conduction velocity and amplitude. Histological examination revealed that the number of nerve fibers, axonal diameter and myelin thickness were significantly higher in the ADSC-implanted animals compared to the control. In addition, we demonstrated that the progression of the regenerative process after ADSC implantation was accompanied by elevated expression of neurotrophic factors at both the early and later phase. Taken together, these results suggest that ADSCs can promote the repair of peripheral nerve injury, and the combination of ADSC and ANA transplantation is a new therapeutic method for long distant peripheral nerve defects. Our data also provide evidence indicating the strong association of neurotrophic factor production to the regenerative potential of implanted ADSCs.