To develop a 3D distortion-free reduced-FOV diffusion-prepared gradient-echo sequence and demonstrate its application in vivo for diffusion imaging of the spinal cord in healthy volunteers. A 3D multi-shot reduced-FOV diffusion-prepared gradient-echo acquisition is achieved using a slice-selective tip-down pulse in the phase-encoding direction in the diffusion preparation, combined with magnitude stabilizers, centric k-space encoding, and 2D phase navigators to correct for intershot phase errors. The accuracy of the ADC values obtained using the proposed approach was evaluated in a diffusion phantom and compared to the tabulated reference ADC values and to the ADC values obtained using a standard spin echo diffusion-weighted single-shot EPI sequence (DW-SS-EPI). Five healthy volunteers were scanned at 3 T using the proposed sequence, DW-SS-EPI, and a clinical diffusion-weighted multi-shot readout-segmented EPI sequence (RESOLVE) for cervical spinal cord imaging. Image quality, perceived SNR, and image distortion were assessed by two expert radiologists. ADC maps were calculated, and ADC values obtained with the proposed sequence were compared to those obtained using DW-SS-EPI and RESOLVE. Consistent ADC estimates were measured in the diffusion phantom with the proposed sequence and the conventional DW-SS-EPI sequence, and the ADC values were in close agreement with the reference values provided by the manufacturer of the phantom. In vivo, the proposed sequence demonstrated improved image quality, improved perceived SNR, and reduced perceived distortion compared to DW-SS-EPI, whereas all measures were comparable against RESOLVE. There were no significant differences in ADC values estimated in vivo for each of the sequences. 3D distortion-free diffusion-prepared imaging can be achieved using the proposed sequence.