Prosaposin is both a precursor of sphingolipid activator proteins and a secreted neurotrophic and myelinotrophic factor. Because peripheral nerve regeneration is impaired in diabetes mellitus, we measured prosaposin protein levels from control and streptozotocin-diabetic rats by collecting endoneurial fluid secreted into a bridging tube connecting the ends of transected sciatic nerve. Prosaposin protein levels were significantly reduced in endoneurial fluid from diabetic rats and increased in the proximal nerve stump compared to controls. To investigate whether a prosaposin-derived peptide could improve nerve regeneration, rats were treated with prosaptide TX14(A) after sciatic nerve crush. In control rats, TX14(A) was without effect in the uninjured nerve but shortened toe spread recovery time after nerve crush. In diabetic rats, efficacy of prosaptide TX14(A) was confirmed by correction of thermal hypoalgesia, formalin-evoked hyperalgesia, and conduction slowing in the uninjured nerve. The peptide also prevented diabetes-induced abnormalities in nerve regeneration distance and mean axonal diameter of regenerated axons, whereas delayed recovery of toe spread was not improved. Muscle denervation atrophy was attenuated by TX14(A) in both control and diabetic rats. These results suggest that reduced prosaposin secretion after nerve injury may contribute to impaired regeneration rates in diabetic rats, and that prosaptide TX14(A) can improve aspects of nerve regeneration.