Functional deficits following spinal cord injury (SCI) primarily attribute to loss of neural connectivity. We therefore tested if novel tissue engineering approaches could enable neural network repair that facilitates functional recovery after spinal cord transection (SCT). Rat bone marrow-derived mesenchymal stem cells (MSCs), genetically engineered to overexpress TrkC, receptor of neurotrophin-3 (NT-3), were pre-differentiated into cells carrying neuronal features via co-culture with NT-3 overproducing Schwann cells in 3-dimensional gelatin sponge (GS) scaffold for 14 days in vitro. Intra-GS formation of MSC assemblies emulating neural network (MSC-GS) were verified morphologically via electron microscopy (EM) and functionally by whole-cell patch clamp recording of spontaneous post-synaptic currents. The differentiated MSCs still partially maintained prototypic property with the expression of some mesodermal cytokines. MSC-GS or GS was then grafted acutely into a 2 mm-wide transection gap in the T9-T10 spinal cord segments of adult rats. Eight weeks later, hindlimb function of the MSC-GS-treated SCT rats was significantly improved relative to controls receiving the GS or lesion only as indicated by BBB score. The MSC-GS transplantation also significantly recovered cortical motor evoked potential (CMEP). Histologically, MSC-derived neuron-like cells maintained their synapse-like structures in vivo; they additionally formed similar connections with host neurites (i.e., mostly serotonergic fibers plus a few corticospinal axons; validated by double-labeled immuno-EM). Moreover, motor cortex electrical stimulation triggered c-fos expression in the grafted and lumbar spinal cord cells of the treated rats only. Our data suggest that MSC-derived neuron-like cells resulting from NT-3-TrkC-induced differentiation can partially integrate into transected spinal cord and this strategy should be further investigated for reconstructing disrupted neural circuits.