The work was carried out on rabbits
Tissue created in a laboratory has been used to completely replace the erectile tissue of the penis in animals.
The advance raises hopes of being able to restore full function to human penises that have been damaged by injury or disease.
Rabbits given the engineered tissue by the scientists from Wake Forest University in North Carolina had normal sexual function and produced offspring.
The study appears online in Proceedings of the National Academy of Sciences.
Professor Anthony Atala said: "Further studies are required, of course, but our results are encouraging and suggest that the technology has considerable potential for patients who need penile reconstruction.
"Our hope is that patients with congenital abnormalities, penile cancer, traumatic injury and some cases of erectile dysfunction will benefit from this technology in the future."
Reconstructing damaged or diseased penile erectile tissue is a tough challenge because of the tissue's complex structure and function.
Known as the corpora cavernosa penis
Two columns of sponge-like material, forming a significant part of the organ
The structures, bound together with connective tissue and covered with skin, fill with blood during an erection
Different approaches have been tried - including the use of silicone prostheses - but with limited success.
The Wake Forest team has already achieved considerable success in the field of tissue engineering, developing whole human bladders that have been implanted into patients.
In a previous study, the researchers engineered short segments of rabbit erectile tissue with 50% of full function.
In the latest work, they harvested smooth muscle cells and endothelial cells from the animals' erectile tissue.
These cells were multiplied in the laboratory and used to seed a three dimensional scaffold, which was implanted into the animals' penis.
Organised erectile tissue with blood vessel structures began to form as early as a month later.
The researchers believe the key was the fact that the cells were injected into the scaffolds on two separate days, enabling them to hold almost six times as many smooth muscle cells as in previous studies.
During an erection, it is the relaxation of smooth muscle tissue that allows an influx of blood into the penis.
The relaxation is triggered by the release of nitric oxide from endothelial cells.
Tests showed that vessel pressure within the engineered tissue was normal and that blood flowed smoothly through it and drained away from it normally after an erection.
When the animals with the engineered tissue mated with females, vaginal swabs contained sperm in eight out of 12 cases. Four of the 12 females were impregnated.
Tim Terry, honorary secretary of the British Association of Urological Surgeons, described the study as "fascinating".
He said complex, highly invasive surgery was often the only option for patients with damaged erectile tissue and the latest work offered long-term hope of a better alternative.
However, he said, much work would be required before the technique could be tested on humans, with potential problems including finding a suitable place to embed the new tissue and ensuring it had an appropriate nerve supply.
"Nevertheless, tissue engineering techniques may well lead to clinical advances with time," he said.