We apply density functional theory at PBE/6-311G(d) level as well as nonorthogonal tight-binding model to study the Stone-Wales transformation in C36 fullerene embedded inside the (14,0) zigzag carbon nanotube. We optimize geometries of two different isomers with the D2d and the D6h symmetries and the transition state dividing them. The mechanism of Stone-Wales transformation from D2d to D6h symmetry for the encapsulated C36 is calculated to be the same as for the isolated one. It is found that the outer carbon wall significantly stabilizes the D6h isomer. However, carbon nanotube reduces the activation barrier of Stone-Wales rearrangement by 0.4 eV compared with the corresponding value for the isolated C36.