The bionic nerve will repair broken "peripheral nerves", which are found outside the brain and spinal cord.
They revealed that the bionic nerve is created from the patient's own stem cells, which can be turned into any tissue from brain to skin cells.
The researchers are planning to place stem cells into nerve cells within a biodegradable plastic tube, which will then be inserted between the two ends of a cut nerve in the body.
New nerve fibres growing in the tube will join with the broken ends to bridge the gap, say the researchers.
Lead researcher Dr Paul Kingham, whose study is published in the journal Experimental Biology, has revealed that his team has already isolated stem cells from the fat of animals, and transformed them into suitable nerve cells.
He is now planning to extract stem cells from fat removed from adult human volunteers, reports the Daily Mail.
The researchers said that the technique could be used to re-attach severed arms and legs, repair nerves cut during cancer surgery, and restore life to transplanted organs.
Professor Giorgio Terenghi, director of the UK Centre for Tissue Regeneration at the university, insists that the new technique is superior to the current method of repairing nerves