Loss of the Merlin tumor suppressor and activation of the Hippo signaling pathway play major roles in the control of cell proliferation and tumorigenesis. We have identified completely novel roles for Merlin and the Hippo pathway effector Yes-associated protein (YAP) in the control of Schwann cell (SC) plasticity and peripheral nerve repair after injury. Injury to the peripheral nervous system (PNS) causes a dramatic shift in SC molecular phenotype and the generation of repair-competent SCs, which direct functional repair. We find that loss of Merlin in these cells causes a catastrophic failure of axonal regeneration and remyelination in the PNS. This effect is mediated by activation of YAP expression in Merlin-null SCs, and loss of YAP restores axonal regrowth and functional repair. This work identifies new mechanisms that control the regenerative potential of SCs and gives new insight into understanding the correct control of functional nerve repair in the PNS.