Extremity injuries involving large bone defects with concomitant severe muscle damage are a significant clinical challenge often requiring multiple treatment procedures and possible amputation. Even if limb salvage is achieved, patients are typically left with severe short- and long-term disabilities. Current preclinical animal models do not adequately mimic the severity, complexity, and loss of limb function characteristic of these composite injuries. The objectives of this study were to establish a composite injury model that combines a critically sized segmental bone defect with an adjacent volumetric muscle loss injury, and then use this model to quantitatively assess human bone morphogenetic protein-2 (rhBMP-2)–mediated tissue regeneration and restoration of limb function. Surgeries were performed on rats in three experimental groups: muscle injury (8-mm-diameter full-thickness defect in the quadriceps), bone injury (8-mm nonhealing defect in the femur), or composite injury combining the bone and muscle defects. Bone defects were treated with 2 μg of rhBMP-2 delivered in the pregelled alginate injected into a cylindrical perforated nanofiber mesh. Bone regeneration was quantitatively assessed using microcomputed tomography, and limb function was assessed using gait analysis and muscle strength measurements. At 12 weeks postsurgery, treated bone defects without volumetric muscle loss were consistently bridged. In contrast, the volume and mechanical strength of regenerated bone were attenuated by 45% and 58%, respectively, in the identically treated composite injury group. At the same time point, normalized muscle strength was reduced by 51% in the composite injury group compared to either single injury group. At 2 weeks, the gait function was impaired in all injury groups compared to baseline with the composite injury group displaying the greatest functional deficit. We conclude that sustained delivery of rhBMP-2 at a dose sufficient to induce bridging of large segmental bone defects failed to promote regeneration when challenged with concomitant muscle injury. This model provides a platform with which to assess bone and muscle interactions during repair and to rigorously test the efficacy of tissue engineering approaches to promote healing in multiple tissues. Such interventions may minimize complications and the number of surgical procedures in limb salvage operations, ultimately improving the clinical outcome.