Spinal cord injury (SCI) is one of the most disabling diseases. Cell-based gene therapy is becoming a major focus for the treatment of SCI. Bone marrow-derived mesenchymal stem cells (BMSCs) are a promising stem cell type useful for repairing SCI. However, the effects of BMSCs transplants are likely limited because of low transplant survival after SCI. Sonic hedgehog (Shh) is a multifunctional growth factor which can facilitate neuronal and BMSCs survival, promote axonal growth, prevent activation of the astrocyte lineage, and enhance the delivery of neurotrophic factors in BMSCs. However, treatment of SCI with Shh alone also has limited effects on recovery, because the protein is cleared quickly. In this study, we investigated the use of BMSCs overexpressing the Shh transgene (Shh-BMSCs) in the treatment of rats with SCI, which could stably secrete Shh and thereby enhance the effects of BMSCs, in an attempt to combine the advantages of Shh and BMSCs and so to promote functional recovery. After Shh-BMSCs treatment of SCI via the subarachnoid, we detected significantly greater damage recovery compared with that seen in rats treated with phosphate-buffered saline (PBS) and BMSCs. Use of Shh-BMSCs increased the expression and secretion of Shh, basic fibroblast growth factor (bFGF) and vascular endothelial growth factor (VEGF), improved the behavioral function, enhanced the BMSCs survival, promoted the expression level of neurofilament 200 (NF200), and reduced the expression of glial fibrillary acidic protein (GFAP). Thus, our results indicated that Shh-BMSCs enhanced recovery of neurological function after SCI in rats and could be a potential valuable therapeutic intervention for SCI in humans.