Introduction: Mesenchymal stem cells (MSCs) and vascular endothelial growth factor (VEGF) are key factors in bone regeneration. Further stimulation should establish an enhanced cell environment optimal for vessel evolvement and hereby being able to attract bone-forming cells. The aim of this study was to generate new bone by using MSCs and VEGF, being able to stimulate growth equal to allograft. Methods: Eight Texel/Gotland sheep had four titanium implants in a size of 10 × 12 mm inserted into bilateral distal femurs, containing a 2 mm gap. In the gap, autologous 3 × 106 MSCs seeded on hydroxyapatite (HA) granules in combination with 10 ng, 100 ng, and 500 ng VEGF release/day were added. After 12 weeks, the implant-bone blocks were harvested, embedded, and sectioned for histomorphometric analysis. Bone formation and mechanical fixation were evaluated. Blood samples were collected for the determination of bone-related biomarkers and VEGF in serum at weeks 0, 1, 4, 8, and 12. Results: The combination of 3 × 106 MSCs with 10 ng, 100 ng, and 500 ng VEGF release/day exhibited similar amount of bone formation within the gap as allograft (P > 0.05). Moreover, no difference in mechanical fixation was observed between the groups (P > 0.05). Serum biomarkers showed no significant difference compared to baseline (all P > 0.05). Conclusion: MSCs and VEGF exhibit significant bone regeneration, and their bone properties equal to allograft, with no systemic increase in osteogenic markers or VEGF with no visible side effects. This study indicates a possible new approach into solving the problem of insufficient allograft, in larger bone defects.