Axonal regeneration at a site of peripheral nerve repair can be impeded by the formation of scar tissue, which creates a mechanical barrier and initiates the development of multiple branched axonal sprouts that form a neuroma. We have investigated the hypothesis that the application of a scar‐reducing agent to the nerve repair site would permit better axonal regeneration. In anaesthetised C57 Black‐6 mice, the left sciatic nerve was sectioned and immediately re‐approximated using four epineurial sutures. In five groups of eight mice, we injected transforming growth factor‐β3 (50 or 500 ng), interleukin‐10 (IL‐10) (125 or 500 ng), or saline into and around the repair site, both before and after the nerve section. Another group of eight animals acted as sham‐operated controls. After 6 weeks, the outcome was assessed by recording compound action potentials (CAPs), measuring collagen levels using picrosirius red staining, and counting the number of myelinated axons proximal and distal to the repair. CAPs evoked by electrical stimulation distal to the repair were significantly smaller in all repair groups except for the low‐dose IL‐10 group, where they were not significantly different from that in controls. The area of staining for collagen had significantly increased in all repair groups except for the low‐dose IL‐10 group, which was not significantly different from that in controls. The myelinated fibre counts were always higher distal to the repair site, but there were no significant differences between groups. We conclude that administration of a low‐dose of IL‐10 to a site of sciatic nerve repair reduces scar formation and permits better regeneration of the damaged axons.