Mesenchymal stem cells (MSCs) were evaluated as an alternative source for tissue engineering of peripheral nerves. MSCs, transdifferentiated MSCs, or Schwann cells cultured from male rats were grafted into devitalized autologous muscle conduits bridging a 2-cm sciatic nerve gap in female rats. The differentiation potential of MSCs and transformed cultivated MSCs into Schwann cell-like cells was exploited using a cocktail of cytokines. Polymerase chain reaction of the SRY gene confirmed the presence of the implanted cells in the grafts. After 6 weeks, regeneration was monitored clinically, histologically, and morphometrically. Autologous nerves and cell-free muscle grafts were used as control. Revascularization studies suggested that transdifferentiated MSCs, in contrast to undifferentiated MSCs, facilitated neo-angiogenesis and did not influence macrophage recruitment. Autologous nerve grafts demonstrated the best results in all regenerative parameters. An appropriate regeneration was noted in the Schwann cell-groups and, albeit with restrictions, in the transdifferentiated MSC groups, whereas regeneration in the MSC group and in the cell-free group was impaired. The results indicate that transdifferentiated MSCs implanted into devitalized muscle grafts are able to support peripheral nerve regeneration to some extent, and offer a potential for new therapeutic strategies.