This study examined the role of aldose reductase (AR) in diabetes-associated impaired nerve regeneration using thy1-YFP (YFP) mice. Sciatic nerves of nondiabetic and streptozotocin-induced diabetic AR(+/+)YFP and AR(-/-)YFP mice were transected after 4 weeks of diabetes. Wallerian degeneration and nerve regeneration were evaluated at 1 and 2 weeks postaxotomy by fluorescence microscopy. Motor nerve conduction velocity recovery and regenerating nerve morphometric parameters were determined at 10 and 20 weeks, respectively. There was no difference in the extent of Wallerian degeneration, size of regenerating stump, motor nerve conduction velocity recovery, or caliber of regenerating fibers between nondiabetic AR(+/+)YFP and AR(-/-)YFP mice. In diabetic AR(+/+)YFP mice, Wallerian degeneration was delayed, associated with slower macrophage invasion and abnormal vascularization. Those mice had smaller regenerating stumps, slower motor nerve conduction velocity, and smaller regenerating fibers compared with nondiabetic mice. These features of impaired nerve regeneration were largely attenuated in diabetic AR(-/-)YFP mice. Retarded macrophage invasion and vascularization associated with Wallerian degeneration were normalized in diabetic AR(-/-)YFP mice. These results indicate that AR plays an important role in diabetes-associated impaired nerve regeneration, in part by affecting vascularization and macrophage invasion during Wallerian degeneration. The thy1-YFP mice are valuable tools for further investigation of the mechanism of diabetes-associated nerve regeneration.