Eighteen gerbils were given a drug to make them deaf in one ear, before being given an injection of 50,000 progenitor cells into the cochlea, which translates sounds into nerve impulses which can be sent to the brain.
On average about a third of the cells grafted themselves to the ear and replace the damaged nerve cells. Brain scans showed that the gerbils typically recovered 45 per cent of their hearing after 10 weeks.
In humans this would translate to someone who could formerly not hear a lorry passing by their window gaining the ability to follow a conversation in a crowded room, researchers said.
They added that the results were variable, with some gerbils recovering up to 90 per cent of their hearing and others seeing very little improvement, depending on how many of the cells took hold.
More research is needed to establish that the benefits of the treatment are lasting and that it is safe for use on humans, but the study represents a "huge step forward" in deafness research, the team said.
Dr Marcelo Rivolta, who led the study, said: "Stem cells have been used in animal models of deafness before, mostly the mouse, with different results, but none have shown functional recovery. What we have shown here is functional recovery using human stem cells, which is unique.
"It is difficult to say when we might be able to treat patients. We are hoping in a few years, but first we need to understand more about the biology of the system and whether it is sustainable in time and safe."
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Stem cells restore hearing to deaf gerbils