Type 1 diabetes is caused by the destruction of pancreatic beta-cells by T cells of the immune system. Islet transplantation is a promising therapy for diabetes mellitus. Bone marrow stem cells (BMSC) have the capacity to differentiate into various cell lineages including endocrine cells of the pancreas. To investigate the conditions that allow BMSC to differentiate into insulin-producing cells, a novel in vitro method was developed by using the histone deacetylase inhibitor, trichostatin A (TSA). BMSC, cultured in presence of TSA, differentiated into islet-like clusters under appropriate culture conditions. These islet-like clusters were similar to the cells of the islets of the pancreas. The islet-like clusters showed endocrine gene expression typical for pancreatic beta-cell development and function, such as insulin (I and II), glucagon, somatostatin, GLUT-2, pancreatic duodenal homeobox-1 (PDX-1), and Pax 4. Immunocytochemistry confirmed islet-like clusters contained pancreatic hormones. The colocalization of insulin and C-peptide was also observed. Enzyme-linked immunosorbent assay analysis demonstrated that insulin secretion was regulated by glucose. Western blot analysis demonstrated the presence of stored insulin. Electron microscopy of the islet-like cells revealed an ultrastructure similar to that of pancreatic beta-cells, which contain insulin granules within secretory vesicles. These findings suggest that histone-deacetylating agents could allow the differentiation of BMSC into insulin-producing beta-cells.