Retinal pigment epithelial (RPE) cell replacement therapy has provided promising outcomes in the treatment of retinal degenerative diseases (RDDs), but the resulting limited visual improvement has raised questions about graft survival and differentiation. Through combined treatment with vitamin C and valproic acid (together, VV), we activated human fetal RPE (fRPE) cells to become highly proliferative fetal RPE stem-like cells (fRPESCs). In this study, we report that SOX2 (SRY-box 2) activation contributed to mesenchymal-epithelial transition and elevated the retinal progenitor and mesenchymal stromal markers expressions of fRPESCs. These fRPESCs could differentiate into RPE cells, rod photoreceptors, and mesenchymal lineage progenies under defined conditions. Finally, fRPESCs were transplanted into the subretinal space of an RDD mouse model, and a photoreceptor rescue benefit was demonstrated. The RPE and rod photoreceptor differentiation of transplanted fRPESCs may account for the neural retinal recovery. This study establishes fRPESCs as a highly proliferative, multi-lineage differentiation potential (including RPE, rod photoreceptor, and mesenchymal lineage differentiation), mesenchymal-to-epithelial-transitioned retinal stem-like cell source for cell-based therapy of RDDs.