This study investigated the protective effect of a liquid rice hull smoke extract (RHSE) against diabetes in alloxan-induced diabetic mice. Antidiabetic effects of RHSE were evaluated in both the rat insulinoma-1 cell line (INS-1) and diabetic ICR mice induced by intraperitoneal (ip) injection of alloxan. Alloxan treatment (10 mM) increased cellular reactive oxygen species (ROS) levels in the INS-1 cells, which were inversely related to cell viabilities. RHSE inhibited alloxan-induced nitric oxide (NO) generation through inhibition of inducible nitric oxide synthase (iNOS) gene expression and suppressed the inflammatory reaction in INS-1 cells through inhibition of expression of pro-inflammatory genes, including tumor necrosis factor-α (TNF-α), interleukin-1β (IL-1β), and interleukin-6 (IL-6). Dietary administration of 0.5 or 1% RHSE to alloxan-induced diabetic mice caused a decrease in blood glucose and increases in both serum insulin and hepatic glycogen levels. RHSE induced decreases in glucose-6-phosphatase (G6 Pase) and phosphoenolpyruvate carboxykinase (PEPCK) levels and an increase in the glucokinase (GCK) level. These changes resulted in restoring glucose-regulating enzyme levels to control values. Histopathology showed that alloxan also induced damage of Langerhans islet cells of the pancreas and liver necrosis associated with diabetes. Oral administration of RHSE restored the islet and liver cells to normal levels. RHSE-supplemented functional food could protect insulin-producing islet cells against damage triggered by oxidative stress and local inflammation associated with diabetes.