Mesenchymal stem cell (MSC) differentiation is dramatically reduced after long-term in vitro culture, which limits their application. MSCs derived from induced pluripotent stem cells (iPSCs-MSCs) represent a novel source of MSCs. In this study, we investigated the therapeutic effect of iPSC-MSCs on diabetic mice. Streptozocin-induced diabetic mice transplanted with 400 islets alone or with 1×10(6) iPSC-MSCs were examined following rapamycin injection (0.1 mg/kg/day, i.p., from days 0 to 9) after transplantation. Our results showed that iPSC-MSCs combined with rapamycin significantly prolonged islet allograft survival in the diabetic mice; 50% of recipients exhibited long-term survival (>100 days). Histopathological analysis revealed that iPSC-MSCs combined with rapamycin preserved the graft effectively, inhibited inflammatory cell infiltration, and resulted in substantial release of insulin. Flow cytometry results showed that the proportion of CD4(+) and CD8(+) T cells was significantly reduced, and the number of T regulatory cells increased in the spleen and lymph nodes in the iPSC-MSCs combined with the rapamycin group compared with the rapamycin-alone group. Production of the Th1 proinflammatory cytokines interleukin-2 (IL-2) and interferon-γ was reduced, and secretion of the anti-inflammatory cytokines IL-10 and transforming growth factor-β was enhanced compared with the rapamycin group, as determined using enzyme-linked immunosorbent assays. Transwell separation significantly weakened the immunosuppressive effects of iPSC-MSCs on the proliferation of Con A-treated splenic T cells, which indicated that the combined treatment exerted immunosuppressive effects through cell-cell contact and regulation of cytokine production. Taken together, these findings highlight the potential application of iPSC-MSCs in islet transplantation.