The present study was undertaken to investigate the effect of standardized aqueous extract of Picrorhiza kurroa Royle ex Benth. on diabetes. Diabetes mellitus was induced with streptozotocinnicotinamide and rats found diabetic were orally administered standardized aqueous extract of Picrorhiza kurroa (100 and 200 mg/kg, p.o.) or glibenclamide (10 mg/kg, p.o.) or vehicle (0.3% carboxy methyl cellulose suspension) for 14 days. Fasting blood glucose levels and lipid profiles were measured in control as well as diabetic rats after two week treatment. In addition, liver glycogen level of Picrorhiza kurroa extract (PkE) treated diabetic rats were compared to that of control and diabetic control rats. Oral glucose tolerance test was also performed on nondiabetic normal rats. Statistical analyses were performed by one way analysis of variance followed by Tukey-Kramer multiple comparisons test. PkE treatment induced significant reduction (p < 0.001) in elevated fasting blood glucose level in streptozotocinnicotinamide induced type-2 diabetic rats. In oral glucose tolerance test, oral administration of PkE increased the glucose tolerance. PkE treatment also significantly (p < 0.001) reversed the weight loss associated with streptozotocin treatment. These findings provide in vivo evidence that standardized extract of Picrorhiza kurroa possess significant antidiabetic activity in streptozotocin-nicotinamide induced type-2 diabetes mellitus in rats.