Transplantation of pancreatic islet cells is the only known potential cure for diabetes mellitus. However, the difficulty in obtaining sufficient numbers of purified islets for transplantation severely limits its use. A renewable and clinically accessible source of stem cells capable of differentiating into insulin-secreting beta-cells might circumvent this limitation. Here, we report that human fetal bone marrow (BM)-derived mesodermal progenitor cells (MPCs) possess the potential to generate insulinsecreting islet-like clusters (ISILCs) when injected into human fetal pancreatic tissues implanted in severe combined immunodeficiency (SCID) mice. Seven essential genes involved in pancreatic endocrine development, including insulin, glucagon, somatostatin, pdx-1, glut-2, nkx 2.2, and nkx 6.1, are expressed in these BM-MPC-derived ISILCs, suggesting that ISILCs are generated through neogenesis of BM-MPCs. Our data further suggest that differentiation of BM-MPCs into ISILCs is not mediated by cell fusion. Insulin secretion from these ISILCs is regulated by glucose concentration in vitro, and transplantation of purified ISILCs normalizes hyperglycemia in streptozocin (STZ)- induced nonobese diabetic (NOD)/SCID mice.