Background— Endothelial progenitor cells (EPCs) are known to promote neovascularization in ischemic diseases. Recent evidence suggested that diabetic neuropathy is causally related to impaired angiogenesis and deficient growth factors. Accordingly, we investigated whether diabetic neuropathy could be reversed by local transplantation of EPCs. Methods and Results— We found that motor and sensory nerve conduction velocities, blood flow, and capillary density were reduced in sciatic nerves of streptozotocin-induced diabetic mice but recovered to normal levels after hind-limb injection of bone marrow–derived EPCs. Injected EPCs were preferentially and durably engrafted in the sciatic nerves. A portion of engrafted EPCs were uniquely localized in close proximity to vasa nervorum, and a smaller portion of these EPCs were colocalized with endothelial cells. Multiple angiogenic and neurotrophic factors were significantly increased in the EPC-injected nerves. These dual angiogenic and neurotrophic effects of EPCs were confirmed by higher proliferation of Schwann cells and endothelial cells cultured in EPC-conditioned media. Conclusions— We demonstrate for the first time that bone marrow-derived EPCs could reverse various manifestations of diabetic neuropathy. These therapeutic effects were mediated by direct augmentation of neovascularization in peripheral nerves through long-term and preferential engraftment of EPCs in nerves and particularly vasa nervorum and their paracrine effects. These findings suggest that EPC transplantation could represent an innovative therapeutic option for treating diabetic neuropathy.