Islet transplantation offers improved glucose homeostasis in diabetic patients, but transplantation of islets is limited by the supply of donor pancreases. Undifferentiated precursors hold promise for cell therapy because they can expand before differentiation to produce a large supply of functional insulin-producing cells. Previously, we described proliferative populations of human islet-derived precursor cells (hIPCs) from adult islets. To show the differentiation potential of hIPCs, which do not express insulin mRNA after at least 1,000-fold expansion, we generated epithelial cell clusters (ECCs) during 4 days of differentiation in vitro. After transplantation into mice, 22 of 35 ECC preparations differentiated and matured into functional cells that secreted human C-peptide in response to glucose. Transcripts for insulin, glucagon, and somatostatin in recovered ECC grafts increased with time in vivo, reaching levels approximately 1% of those in adult islets. We show that hIPCs are mesenchymal stromal cells (MSCs) that adhere to plastic, express CD73, CD90, and CD105, and can differentiate in vitro into adipocytes, chondrocytes, and osteocytes. Moreover, we find a minor population of CD105(+)/CD73(+)/CD90(+) cells in adult human islets (prior to incubation in vitro) that express insulin mRNA at low levels. We conclude that hIPCs are a specific type of pancreas-derived MSC that are capable of differentiating into hormone-expressing cells. Their ability to mature into functional insulin-secreting cells in vivo identifies them as an important adult precursor or stem cell population that could offer a virtually unlimited supply of human islet-like cells for replacement therapy in type 1 diabetes. Disclosure of potential conflicts of interest is found at the end of this article.