Bone morphogenetic proteins (BMPs), members of the transforming growth factor-β subfamily, function as instructive signals for neuronal lineage commitment and promote neuronal differentiation. However, the mechanism of BMP7 action in vivo after peripheral nerve injury is poorly understood. This study examines the efficacy of gene transfer of adenoviral (Ad) BMP7 on peripheral neuropathy. Transgene expression was found in both Ad-infected sciatic nerves and their respective remote neurons, indicating Ad transduction by a retrograde transport. After AdBMP7 infection to nerves, the sciatic nerves were crushed or transected. Hind limb functional behavior, including rotarod test and sciatic functional index, were conducted in rats weekly after nerve injury. Interestingly, enhanced BMP7 expression significantly improved hind limb functional recovery in AdBMP7-transduced rats when compared with AdGFP-transduced nerve-crushed or transected rats. Furthermore, AdBMP7 transduction reduced injury-induced macrophage activation, nerve demyelination and axonal degeneration. By contrast, AdBMP7 infection did not affect the hyperalgesia paw-withdrawal latency after nerve injury. We further examined the effect of AdBMP7 infection on sciatic nerve explant and Schwann cell cultures. Enhanced cell proliferation was significantly increased by AdBMP7 transduction in both cultures. Taken together, BMP7 overexpression by Ad gene transfer was beneficial in both nerves and Schwann cells on functional recovery after sciatic nerve injury in rats.