Loss of insulin-producing β-cell mass is a hallmark of type 2 diabetes in humans and diabetic db/db mice. Pancreatic β-cells can modulate their mass in response to a variety of physiological and pathophysiological cues. There are currently few effective therapeutic approaches targeting β-cell regeneration although some anti-diabetic drugs may positively affect β-cell mass. Here we show that oral administration of FTY720, a sphingosine 1-phosphate (S1P) receptor modulator, to db/db mice normalizes fasting blood glucose by increasing β-cell mass and blood insulin levels without affecting insulin sensitivity. Fasting blood glucose remained normal in the mice even after the drug was withdrawn after 23 weeks of treatment. The islet area in the pancreases of the FTY720-treated db/db mice was more than 2-fold larger than that of the untreated mice after 6 weeks of treatment. Furthermore, BrdU incorporation assays and Ki67 staining demonstrated cell proliferation in the islets and pancreatic duct areas. Finally, islets from the treated mice exhibited a significant decrease in the level of cyclin-dependent kinase inhibitor p57(KIP2) and an increase in the level of cyclin D3 as compared with those of untreated mice, which could be reversed by the inhibition of phosphatidylinositol 3-kinase (PI3K). Our findings reveal a novel network that controls β-cell regeneration in the obesity-diabetes setting by regulating cyclin D3 and p57(KIP2) expression through the S1P signaling pathway. Therapeutic strategies targeting this network may promote in vivo regeneration of β-cells in patients and prevent and/or cure type 2 diabetes.