The gel was made by embedding neural stem cells in a mixture of blood clotting protein and growth chemicals which is to be applied to the site of an injury.
Previously paralysed animals when treated with the gel experienced 'significant' functional improvement and were able to move all the joints of their affected legs.
The gel produced an 'astonishing degree' of nerve growth in rats with completely severed spinal cords.
"Using this method, after six weeks the number of axons (nerve fibres) emerging from the injury site exceeded by 200-fold what had ever been seen before," lead researcher Professor Mark Tuszynski, from the University of California at San Diego, said.
"The axons also grew ten times the length of axons in any previous study, and, importantly, the regeneration of these axons resulted in significant functional improvement," Tuszynski said in a statement.
Similar results were obtained in the laboratory using human stem cells.
The researchers took around a month to transform stem cells originally taken from fat tissue into sections of fully-formed bone up to several centimetres long.
Standard bone grafts involve two procedures, to cut bone from elsewhere in the patient's body before transplanting it into the damaged area, which carry the risk of infection and complications.
Bones can also be obtained from donations, but this brings the chance of rejection.
This new method would allow bones to be custom made to shape outside the body, using the patients own stem cells, removing the need for a potentially traumatic operation and reducing the likelihood of rejection.
The research has been carried out only on animals but a patient trial is planned for later this year.
