Aim The purpose of the present study was to evaluate whether a diagnosis of dementia before stroke onset (pre‐stroke dementia [PSD]) affects the short‐term functional outcome of elderly ischemic stroke patients. Methods This was a retrospective case–control study comprising of consecutive elderly ischemic stroke patients. Functional outcome was assessed by the Functional Independence Measure scale (FIM) at admission and discharge. Data was analyzed by t‐test, χ2‐test, multiple linear regression analysis and logistic regression. Results There were 919 patients with acute ischemic stroke, out of whom 11.5% were diagnosed with PSD on index day. Compared with non‐PSD patients, those with pre‐stroke dementia had a shorter length of stay (P < 0.001), higher rate of female patients (P < 0.001) and lower Mini‐Mental State Examination scores (P < 0.001). Both total and motor FIM scores at admission and discharge, and their respective FIM gain scores at discharge were higher in non‐PSD compared with PSD patients (P < 0.001). In logistic regression analysis to identify factors predicting successful outcome (defined as total FIM at discharge ≥80), PSD remained as significantly associated with increased risk for adverse outcome on discharge (OR 2.449, CI 1.207–4.970, P = 0.013). Conclusions The present findings suggest that a diagnosis of pre‐stroke dementia is associated with lower FIM scores at admission and discharge in patients with ischemic stroke. Yet, daily motor FIM gains were similar in PSD and non‐PSD patients, suggesting that these patients should not be deprived of a post‐acute rehabilitation, based on a diagnosis of dementia before stroke onset. Geriatr Gerontol Int 2016; 16: 928–933.