Tendon tissue regeneration is an important goal for orthopedic medicine. We hypothesized that implantation of Smad8/BMP2‐engineered MSCs in a full‐thickness defect of the Achilles tendon (AT) would induce regeneration of tissue with improved biomechanical properties. A 2 mm defect was created in the distal region of murine ATs. The injured tendons were then sutured together or given implants of genetically engineered MSCs (GE group), non‐engineered MSCs (CH3 group), or fibrin gel containing no cells (FG group). Three weeks later the mice were killed, and their healing tendons were excised and processed for histological or biomechanical analysis. A biomechanical analysis showed that tendons that received implants of genetically engineered MSCs had the highest effective stiffness (>70% greater than natural healing, p < 0.001) and elastic modulus. There were no significant differences in either ultimate load or maximum stress among the treatment groups. Histological analysis revealed a tendon‐like structure with elongated cells mainly in the GE group. ATs that had been implanted with Smad8/BMP2‐engineered stem cells displayed a better material distribution and functional recovery than control groups. While additional study is required to determine long‐term effects of GE MSCs on tendon healing, we conclude that genetically engineered MSCs may be a promising therapeutic tool for accelerating short‐term functional recovery in the treatment of tendon injuries. © 2012 Orthopaedic Research Society. Published by Wiley Periodicals, Inc. J Orthop Res 30:1932–1939, 2012