It has been demonstrated that intracavernous injection of bone marrow-derived mesenchymal stem cells (BM-MSCs) had beneficial effects on improving erectile function in type-1 diabetic rats. This study was designed to investigate the neurotrophic effect of BM-MSCs for type-1 diabetic rats. Streptozocin-induced type-1 diabetic rats were randomly divided into three groups: diabetic group, BM-MSCs-treated group and BM-MSCs-conditioned medium-treated group. At the 3d, 1 and 2w time points after BM-MSCs injection, three randomly selected rats in MSCs group were sacrificed and penile samples were harvested to detect BM-MSCs in penile tissue. Four weeks after intracavernous injection of BM-MSCs or BM-MSCs-conditioned medium, intracavernous pressure (ICP) was assessed to evaluate the erectile function. Immunohistochemistry was used to track labelled BM-MSCs in penile tissue and to detect neuronal nitric oxide synthase (nNOS) and neurofilament (NF) positive fibres in penile dorsal nerve. Enzyme lined immunosorbent assay (ELISA) was used to measure the concentrations of vascular endothelial growth factor (VEGF), nerve growth factor (NGF) and brain-derived neurotrophic factor (BDNF) in BM-MSCs-conditioned medium. BM- MSCs secreted detectable levels of VEGF, BDNF and NGF. Intracavernous injection of BM-MSCs improved erectile function in diabetic rats. The functional improvement was accompanied by promoted nNOS and NF positive nerve fibres within penile dorsal nerve in type-1 diabetic rats. Histological data revealed a time-dependent decrease in the number of BM-MSCs in the corpus cavernosum following injection. Furthermore, the beneficial effect of BM-MSCs was partially repeated by BM-MSCs-conditioned medium. Intracavernous injection of BM-MSCs is effective in improving nerve regeneration in diabetic rats. Paracrine effects of BM-MSCs are probably involved in the improvement.