Objective: To determine the prognostic value of MRI-based tumor regression grading (mrTRG) in rectal cancer compared with pathological tumor regression grading (pTRG), and to assess the effect of diffusion-weighted imaging (DWI) on interobserver agreement for evaluating mrTRG. Materials and Methods: Between 2007 and 2016, we retrospectively enrolled 321 patients (male:female = 208:113; mean age, 60.2 years) with rectal cancer who underwent both pre-chemoradiotherapy (CRT) and post-CRT MRI. Two radiologists independently determined mrTRG using a 5-point grading system with and without DWI in a one-month interval. Two pathologists graded pTRG using a 5-point grading system in consensus. Kaplan-Meier estimation and Cox-proportional hazard models were used for survival analysis. Cohen's kappa analysis was used to determine interobserver agreement. Results: According to mrTRG on MRI with DWI, there were 6 mrTRG 1, 48 mrTRG 2, 109 mrTRG 3, 152 mrTRG 4, and 6 mrTRG 5. By pTRG, there were 7 pTRG 1, 59 pTRG 2, 180 pTRG 3, 73 pTRG 4, and 2 pTRG 5. A 5-year overall survival (OS) was significantly different according to the 5-point grading mrTRG (p = 0.024) and pTRG (p = 0.038). The 5-year disease-free survival (DFS) was significantly different among the five mrTRG groups (p = 0.039), but not among the five pTRG groups (p = 0.072). OS and DFS were significantly different according to post-CRT MR variables: extramural venous invasion after CRT (hazard ratio = 2.259 for OS, hazard ratio = 5.011 for DFS) and extramesorectal lymph node (hazard ratio = 2.610 for DFS). For mrTRG, k value between the two radiologists was 0.309 (fair agreement) without DWI and slightly improved to 0.376 with DWI. Conclusion: mrTRG may predict OS and DFS comparably or even better compared to pTRG. The addition of DWI on T2-weighted MRI may improve interobserver agreement on mrTRG.N