The study on rats, published in the journal Nature, showed some degree of movement and bladder control could be restored.
The drug works by disrupting the “sticky glue” that prevents nerve cells from growing during an injury.
Further tests still need to take place, but the charity Spinal Research said “real progress” was being made.
Damage to the spinal cord interrupts the constant stream of electrical signals from the brain to the body.
It can lead to paralysis below an injury.
The team at Case Western Reserve University School of Medicine, in Ohio, said scar tissue that formed after an injury prevented spinal cord repair.
Sugary proteins are released by the scar tissue which act like glue.
The long spindly part of the nerve – the axon – gets trapped in the glue if it tries to cross the site of the injury.
The research team injected a chemical under the skin which crossed into the spinal cord and disrupted the activity of the glue.
“It was amazing – the axons kept growing and growing,” said lead researcher Prof Jerry Silver.
In the tests, 21 out of 26 rats showed some degree of recovery either in their ability to move or in bladder function.
Prof Silver told the BBC: “What we could see was really remarkable. Some recovered to a fantastic extent and so well you could hardly tell there was an injury.”
He says further testing in larger animals is needed before human trials can take place.