Peripheral nerve injury repair can be enhanced by Schwann cell (SC) transplantation, but clinical applications are limited by the lack of a cell source. Thus, alternative systems for generating SCs are desired. Herein, we found the peripheral blood-derived mesenchymal stem cells (PBMSCs) could be induced into SC like cells with expressing SC-specific markers (S100, P75NTR and CNPase) and functional factors (NGF, NT-3, c-Fos, and Krox20). When the induced PBMSCs (iPBMSCs) were transplanted into crushed rat sciatic nerves, they functioned as SCs by wrapping the injured axons and expressing myelin specific marker of MBP. Furthermore, iPBMSCs seeded in an artificial nerve conduit to bridge a 10-mm defect in a sciatic nerve achieved significant nerve regeneration outcomes, including axonal regeneration and remyelination, nerve conduction recovery, and restoration of motor function, and attenuated myoatrophy and neuromuscular junction degeneration in the target muscle. Overall, the data from this study indicated that PBMSCs can transdifferentiate towards SC-like cells and have potential as grafting cells for nerve tissue engineering.