Peripheral nerve injury (PNI) is a common disease that often results in axonal degeneration and the loss of neurons, ultimately leading to limited nerve regeneration and severe functional impairment. Currently, there are no effective treatments for PNI. In the present study, we transduced conserved dopamine neurotrophic factor (CDNF) into mesenchymal stem cells (MSCs) in collagen tubes to investigate their regenerative effects on rat peripheral nerves in an in vivo transection model. Scanning electron microscopy of the collagen tubes demonstrated their ability to be resorbed in vivo. We observed notable overexpression of the CDNF protein in the distal sciatic nerve after application of CDNF-MSCs. Quantitative analysis of neurofilament 200 (NF200) and S100 immunohistochemistry showed significant enhancement of axonal and Schwann cell regeneration in the group receiving CDNF-MSCs (CDNF-MSCs group) compared with the control groups. Myelination thickness, axon diameter and the axon-to fiber diameter ratio (G-ratio) were significantly higher in the CDNF-MSCs group at 8 and 12 weeks after nerve transection surgery. After surgery, the sciatic functional index, target muscle weight, wet weight ratio of gastrocnemius muscle and horseradish peroxidase (HRP) tracing demonstrated functional recovery. Light and electron microscopy confirmed successful regeneration of the sciatic nerve. The greater numbers of HRP-labeled neuron cell bodies and increased sciatic nerve index values (SFI) in the CDNF-MSCs group suggest that CDNF exerts neuroprotective effects in vivo. We also observed higher target muscle weights and a significant improvement in muscle atrophism in the CDNF-MSCs group. Collectively, these findings indicate that CDNF gene therapy delivered by MSCs is capable of promoting nerve regeneration and functional recovery, likely because of the significant neuroprotective and neurotrophic effects of CDNF and the superior environment offered by MSCs and collagen tubes.