In trials, alemtuzumab reduced the number of attacks in sufferers and also helped them recover lost functions, apparently allowing damaged brain tissue to repair so that individuals were less disabled than at the start of the study.
"The ability of an MS drug to promote brain repair is unprecedented," said Dr Alasdair Coles, a lecturer at Cambridge university's department of clinical neurosciences, who coordinated many aspects of the study.
"We are witnessing a drug which, if given early enough, might effectively stop the advancement of the disease and also restore lost function by promoting repair of the damaged brain tissue."
The MS Society, Britain's largest support charity for those affected by the condition, said it was "delighted" at the trial's results, which must be followed up with more research before the drug can be licensed.
"This is the first drug that has shown the potential to halt and even reverse the debilitating effects of MS and this news will rightly bring hope to people living with the condition day in, day out," said head of research Lee Dunster.
MS is an auto-immune disease that affects millions of people worldwide, including almost 100,000 in Britain and 400,000 in the United States.
It is caused by the body's immune system attacking nerve fibres in the central nervous system, and can lead to loss of sight and mobility, depression, fatigue and cognitive problems. There is no cure, and few effective treatments.
In the trial, 334 patients diagnosed with early-stage relapsing-remitting MS who had not previously been treated were given alemtuzumab or interferon beta-1a, one of the most effective licensed therapies for similar MS cases.
After three years, alemtuzumab was found to reduce the number of attacks the patients suffered by 74 percent over the other treatment, and reduce the risk of sustained accumulation of disability by 71 percent over interferon beta-1a.
Many individuals who took alemtuzumab also recovered some of their lost functions, becoming less disabled by the end, while the disabilities of the other patients worsened, the study in the New England Journal of Medicine said.
Alastair Compston, professor of neurology and head of the clinical neurosciences department at Cambridge, said alemtuzumab was the "most promising" experimental drug for the treatment of MS.
He expressed hope that further trials "will confirm that it can both stabilise and allow some recovery of what had previously been assumed to be irreversible disabilities".
Alemtuzumab was developed in Cambridge and has been licensed for the treatment of chronic lymphocytic leukaemia.