In this study we describe the derivation and immunological characterization of a primary epithelial cell type from the human umbilical cord membrane. These cord lining epithelial cells (CLECs) expressed and/or secreted isoforms of the nonclassical human leukocyte antigen class I (HLA-1b) glycoproteins, HLA-G and E. Conditioned media from CLECs inhibited mitogen-stimulated T-lymphocyte responses, and in a mixed leukocyte reaction (MLR) assay, cocultured CLECs inhibited allogeneic responses with a concomitant reduction in proinflammatory cytokines. Using a transwell coculture system, it was demonstrated that these immunoregulatory effects were mediated by soluble factors secreted by CLECs, in a dose-dependent manner. Functional studies using HLA-G blocking antibody showed that the effects of CLEC-secreted products could be inhibited, thus demonstrating a significant and important role for soluble HLA-G. In vivo, we show that transplanted CLECs could be maintained for extended periods in immunocompetent mice where xenorejection rapidly destroyed primary keratinocytes, a control human epithelial cell type. Additionally, CLECs delayed the rejection of keratinocytes and extended their survival when cotransplanted, indicating an ability to protect adjacent human cell types that would otherwise be rejected if transplanted alone. We also show that CLECs transduced with a modified human proinsulin gene were transplanted intraperitoneally into streptozotocin (STZ)-induced diabetic mice, resulting in significantly lower levels of serum glucose compared to control mice. This study has characterized the immunological properties of CLECs and tested a potential therapeutic application in the treatment of a type 1 diabetes mouse model.