Respiratory muscle paralysis due to trauma or neurodegenerative diseases can have devastating consequences. Only a few studies have investigated the reconstruction of motor function in denervated diaphragms caused by such conditions. Here, we studied the efficacy of transplanting E14 embryonic spinal motor neurons (SMNs) into peripheral nerve grafts for functionally reconstructing a denervated diaphragm in a rat model. The diaphragms of 8-week-old male Fischer 344 rats were first denervated by transecting the phrenic nerves. Subsequently, peripheral nerve grafts taken from the lower limb were used for neurotization of the denervated diaphragms. One week later, fetal E14 SMNs were transplanted into the peripheral nerve grafts. After 3 months, we observed functional contraction of the diaphragm following neuromuscular electrical stimulation (NMES) of the peripheral nerve graft. Additionally, we confirmed that SMN transplantation into the peripheral nerve graft had an inhibitory effect on diaphragm muscle atrophy. The SMNs transplanted into the peripheral nerve grafts formed a structure similar to the spinal cord, and the neuromuscular junction of the denervated diaphragm was reinnervated. These findings suggest the establishment of an ectopic motor neuron pool in the peripheral nerve graft. Free peripheral intra-nerve SMN transplantation in combination with NMES, which can be applied for diaphragmatic pacing, offers novel insights into the development of neuroregenerative therapies for treating life-threatening and intractable respiratory muscle paralysis caused by severe nerve damage and degenerative diseases.