Stem cell transplantation has been shown to improve functional outcome in degenerative and ischemic disorders. However, low in vivo survival and differentiation potential of the transplanted cells limits their overall effectiveness and thus clinical usage. Here we show that, after in vitro induction of neuronal differentiation and dedifferentiation, on withdrawal of extrinsic factors, mesenchymal stem cells (MSCs) derived from bone marrow, which have already committed to neuronal lineage, revert to a primitive cell population (dedifferentiated MSCs) retaining stem cell characteristics but exhibiting a reprogrammed phenotype distinct from their original counterparts. Of therapeutic interest, the dedifferentiated MSCs exhibited enhanced cell survival and higher efficacy in neuronal differentiation compared to unmanipulated MSCs both in vitro and in vivo, with significantly improved cognition function in a neonatal hypoxic–ischemic brain damage rat model. Increased expression of bcl-2 family proteins and microRNA-34a appears to be the important mechanism giving rise to this previously undefined stem cell population that may provide a novel treatment strategy with improved therapeutic efficacy. STEM CELLS 2011;29:2077–2089.