This study aimed to investigate the therapeutic potential of human adipose‐derived mesenchymal stem cells (hADSCs) modified with recombinant adeno‐associated virus (rAAV) carrying the vascular endothelial growth factor 165 (VEGF165) gene in peripheral nerve injury (PNI). The hADSCs were categorized into blank, control (transduced with rAAV control vector), and VEGF165 (transduced with rAAV VEGF165 vector) groups. Subsequently, Schwann cell differentiation was induced, and Schwann cell markers were assessed. The sciatic nerve injury mouse model received injections of phosphate‐buffered saline (PBS group), PBS containing hADSCs (hADSCs group), rAAV control vector (control‐hADSCs group), or rAAV VEGF165 vector (VEGF165‐hADSCs group) into the nerve defect site. Motor function recovery, evaluated through the sciatic function index (SFI), and nerve regeneration, assessed via toluidine blue staining along with scrutiny of Schwann cell markers and neurotrophic factors, were conducted. Modified hADSCs exhibited enhanced Schwann cell differentiation and elevated expression of Schwann cell markers [S100 calcium‐binding protein B (S100B), NGF receptor (NGFR), and glial fibrillary acidic protein (GFAP)]. Mice in the VEGF165‐hADSCs group demonstrated improved motor function recovery compared to those in the other three groups, accompanied by increased fiber diameter, axon diameter, and myelin thickness, as well as elevated expression of Schwann cell markers (S100B, NGFR, and GFAP) and neurotrophic factors [mature brain‐derived neurotrophic factor (BDNF) and glial cell‐derived neurotrophic factor (GDNF)] in the distal nerve segment. rAAV‐VEGF165 modification enhances hADSC potential in PNI, promoting motor recovery and nerve regeneration. Elevated Schwann cell markers and neurotrophic factors underscore therapy benefits, providing insights for nerve injury strategies.