AIM: To investigate the effects of Sonic hedgehog (Shh) gene-modified bone marrow mesenchymal stem cells (MSCs) on graft-induced retinal gliosis and retinal ganglion cells (RGCs) survival in diabetic mice. METHODS: Bone marrow-derived MSCs were genetically modified with the Shh gene to generate a stably transfected cell line of Shh-modified MSCs (MSC-Shh). Intravitreal injections of MSC-Shh and green fluorescent protein-modified MSCs (MSC-Gfp; control) were administered in diabetic mice. After 4wk, the effects of MSC-Shh on retinal gliosis were evaluated using fundus photography, and markers of gliosis were examined by immunofluorescence and Western blotting. The neurotrophic factors expression and RGCs survival in the host retina were evaluated using Western blotting and immunofluorescence. The mechanisms underlying the effects of MSC-Shh was investigated. RESULTS: A significant reduction of proliferative vitreoretinopathy (PVR) was observed after intravitreal injection of MSC-Shh compared to MSC-Gfp. Significant downregulation of glial fibrillary acidic protein (GFAP) was demonstrated in the host retina after MSC-Shh administration compared to MSC-Gfp. The extracellular signal-regulated kinase 1/2 (ERK1/2), protein kinase B (AKT) and phosphatidylin-ositol-3-kinase (PI3K) pathways were significantly downregulated after MSC-Shh administration compared to MSC-Gfp. Brain-derived neurotrophic factor (BDNF) and ciliary neurotrophic factor (CNTF) levels were significantly increased in the host retina, and RGCs loss was significantly prevented after MSC-Shh administration. CONCLUSION: MSC-Shh administration reduces graft-induced reactive gliosis following intravitreal injection in diabetic mice. The ERK1/2, AKT and PI3K pathways are involved in this process. MSC-Shh also increases the levels of neurotrophic factors in the host retina and promoted RGCs survival in diabetic mice.