Bone marrow-derived mononuclear cells (BMNCs) have been shown to effectively treat ischemic cardiovascular diseases. Because diabetic neuropathy (DN) is causally associated with impaired angiogenesis and deficiency of angiogenic and neurotrophic factors in the nerves, we investigated whether DN can be ameliorated by local injection of BMNCs. Severe peripheral neuropathy, characterized by a significant decrease in the motor and sensory nerve conduction velocities (NCVs), developed 12 weeks after the induction of diabetes with streptozotocin in rats. The injection of BMNCs restored motor and sensory NCVs to normal levels and significantly improved vascular density and blood flow in diabetic nerves over 4 weeks. Fluorescent microscopic observation revealed that DiI-labeled BMNCs preferentially engrafted in sciatic nerves. Whole-mount fluorescent imaging and confocal microscopic evaluation demonstrated that many of the BMNCs localized following the course of the vasa nervorum in close proximity to blood vessels without incorporation into vasa nervorum as endothelial cells at a detectable level. Real-time reverse transcription-polymerase chain reaction analysis showed that the levels of angiogenic and neurotrophic factors were significantly increased in the nerves by BMNC injection. Local transplantation of BMNCs improved experimental DN by augmenting angiogenesis and increasing angiogenic and neurotrophic factors in peripheral nerves. These findings suggest that BMNC transplantation may represent a novel therapeutic option for treating DN.