Cells from human embryos have been used to make paralysed rats walk again.
The US researchers who carried out the experiments hope it should be possible to begin similar trials on human subjects in just two years.
Stem cell use is controversial
Embryonic stem cells (ESCs) have huge potential use for scientists because they have the ability to turn into many different forms of tissue. However, their use remains highly controversial.
Britain has allowed scientists to conduct embryonic stem cell experiments, but they could soon be banned by the European Union, and the US is still considering the issue.
New Scientist magazine reports that the US team harvested cells from human embryos at an early stage of development.
They then manipulated them in the laboratory to turn them into specialised cells that form myelin, the insulating layer than surrounds nerve fibres.
These cells were transplanted into paralysed rats with bruised spines.
After nine weeks, the rats fully regained the ability to walk.
Analysis of the rats' spinal cords showed that the cells had wrapped themselves around nerve cells and formed new myelin sheaths.
They also secreted substances that appeared to have stimulated the formation of new nerves.
Dr Hans Keirstead and his team from the University of California at Irvine now plan to use the same technique to treat human patients who have sustained recent spinal cord injuries.
However, treating people who have been paralysed for years or suffer from degenerative nerve diseases will be far more difficult.
Scientists have tried using adult stem cells derived from bone marrow and nerve cells to repair damaged spines.
But Thomas Okarma, of US biotech company Geron Corporation, which funded the new research, believes only ESCs stand a real chance of success.
They are more versatile than adult stem cells, and, unlike them, can be mass-produced.
Mr Okarma said: "At this moment, there is very little hard evidence that a bone marrow stem cell can turn into anything but blood or that a skin stem cell can become anything but skin."