Chronic nerve compression (CNC) injuries induce a robust Schwann cell proliferation in a distinct spatial and temporal pattern, which is accompanied by an increase in the number of small un-myelinated axons in the area of the injury. These findings suggest that this local proliferation of Schwann cells may induce local axonal sprouting. Here, we use quantitative electron microscopic techniques to define the nature of this sprouting response, and explore whether the local sprouting is in response to down-regulation of expression of myelin-associated glycoprotein (MAG) by proliferating Schwann cells. Axonal sprouting was observed without evidence of Wallerian degeneration in the outer region of CNC-injured nerves with a noticeable increase in Remak bundles within this region of injury. Immunolabeling of teased nerve fibers and Western blot analysis of nerves from CNC-injured animals revealed a local down-regulation of MAG protein within the zone of injury. Moreover, local delivery of purified MAG protein intraneurally at the time of CNC model creation abrogates the axonal sprouting response. These data demonstrate that CNC injury triggers axonal sprouting and suggests that a local down-regulation of MAG within the peripheral nerve secondary to CNC injury is the critical signal for the sprouting response.