Nerve injury can lead to devastating pain and for the majority of patients there are no effective therapies. Here we develop a model of neuropathic pain in Drosophila. Mechanistically and genetically, we prove for the first time that peripheral injury triggers a coordinated response from primary afferents resulting in loss of central inhibition, and culminating in a permanently sensitized pain circuit. While loss of central GABAergic tone was necessary for neuropathic pain to develop, disrupting inhibitory signaling was sufficient to trigger neuropathic sensitization without injury. To test the therapeutic potential of restoring central GABAergic inhibition, we generated and transplanted IPSC derived GABAergic inhibitory neurons into the spinal cord of mice suffering from neuropathic pain. Remarkably, iPSC-derived inhibitory neurons promoted lasting pain relief without side effects. Together, these data highlight that central disinhibition is critical to neuropathic pain, and for the first time describe an iPSC transplant therapy that is an effective and long-lasting treatment for neuropathic pain.