Despite known detrimental effects on the blood flow and histology of nerves after intraneural corticosteroid injection, the neurotoxic effect of corticosteroids remains unclear. We investigated the effect of topical dexamethasone on nerve function. Two sponge strips soaked with dexamethasone at doses of 0.8, 1.6, and 3.2 mg were placed under and over the left sciatic nerve of adult Wistar rats for 30 minutes. Mixed-nerve-elicited somatosensory evoked potentials and dermatomal somatosensory evoked potentials were evaluated immediately and repeated together with functional tests and histology 2 weeks later. Evoked potential amplitude was dose-dependently lower and latency was prolonged in dexamethasone-treated sciatic nerves compared to controls. The suppression persisted with incomplete recovery for at least 4 hours, but differences between treated and control nerves were not significant after 2 weeks. Topical dexamethasone adversely affected neural conduction in a dose-dependent manner. Our results suggest that caution is required when using large doses of corticosteroid for injection of the carpal tunnel.