Adoption of innovation plays a crucial role in the transformation of the countryside towards a knowledge economy. However, rural SMEs experience various obstacles that hinder the adoption of innovation. The aim of this paper is to identify the main challenges and opportunities for the introduction of innovation in rural SMEs. The evidence is drawn from relevant literature and stakeholder discussions covering six European countries (Bulgaria Czech Republic, Hungary, Italy, Latvia and Slovenia). The main challenges in adopting innovation in rural SMEs are shortcomings in the environment for innovation, inappropriate innovation policies and support measures, lack of knowledge and skills within companies, difficulties to hire a new skilled work force and low competitiveness compared to urban counterparts. Consequently, policy recommendations are proposed for promoting innovation in rural SMEs by focusing on cooperation and networking, information and training, innovation support programmes, marketing and sales promotion and availability of workforce.