Stroke is a leading cause of disability and death due to the brain’s limited ability to regenerate damaged circuits. Induced pluripotent stem cell (iPSC)-based therapies are emerging as a promising therapeutic approach for stroke recovery. Here, we demonstrate that local transplantation of GMP-compatible iPSC-derived neural progenitor cells (NPCs) improve long-term recovery-associated brain tissue responses and reduce neurological deficits after cerebral ischemia in mice. Using in vivo imaging and post-mortem histology, we showed long-term graft survival over the course of five weeks and preferential graft differentiation into mature neurons without signs of pluripotent residuals. Transplantation of NPCs led to a set of recovery-associated tissue responses including increased vascular sprouting and repair, reduced blood-brain barrier disruption, reduced microglial activation and increased neurogenesis compared to sham-transplanted control animals. Deep learning-assisted behavior analysis revealed that NPC-treated mice displayed improved gait performance and complete fine-motor recovery five weeks post-injury. To dissect the molecular graft composition and identify graft-host interactions, we performed single nucleus profiling of the cell transplants and host stroke tissue that identified graft differentiation preferentially towards GABAergic cells with remaining cells acquiring glutamatergic neuron, astrocyte, and NPC-like phenotypes. Interaction between graft and host transcriptome indicates that GABAergic cell grafts were primarily involved in graft-host communication through the regeneration-associated NRXN, NRG, NCAM and SLIT signalling pathways. In conclusion, our study reveals that transplanted iPSC-derived NPCs primarily differentiate into GABAergic neurons contributing to long-term recovery and further delineates the regenerative interactions between the graft and the stroke-injured host tissue.