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Drainage and deforestation of tropical peat swamp forests (PSF) in Southeast Asia cause carbon emissions and biodiversity loss of global concern. Restoration efforts to mitigate these impacts usually involve peatland rewetting by blocking canals. However, there have been no studies to date of the optimal rewetting approach that will reduce carbon emission whilst also promoting PSF regeneration. Here we present results of a large-scale restoration trial in Sumatra (Indonesia), monitored for 7.5 years. Water levels in a former plantation were raised over an area of 4800 ha by constructing 257 compacted peat dams in canals. We find peat surface subsidence rates in the rewetted restoration area and adjoining PSF to be halved where water tables were raised from ~ − 0.6 m to ~ − 0.3 m, demonstrating the success of rewetting in reducing carbon emission. A total of 57 native PSF tree species were found to spontaneously grow in the most rewetted conditions and in high densities, indicating that forest regrowth is underway. Based on our findings we propose that an effective PSF restoration strategy should follow stepwise rewetting to achieve substantial carbon emission reduction alongside unassisted regrowth of PSF, thereby enabling the peat, forest and canal vegetation to establish a new nature-based ecosystem balance. [ABSTRACT FROM AUTHOR]