BACKGROUND Despite the availability of current therapies, including oral antidiabetic drugs and insulin, for controlling the symptoms caused by high blood glucose, it is difficult to cure diabetes mellitus, especially type 1 diabetes mellitus. AIM Cell therapies using mesenchymal stem cells (MSCs) may be a promising option. However, the therapeutic mechanisms by which MSCs exert their effects, such as whether they can differentiate into insulin-producing cells (IPCs) before transplantation, are uncertain. METHODS In this study, we used three types of differentiation media over 10 d to generate IPCs from human Wharton's jelly MSCs (hWJ-MSCs). We further transplanted the undifferentiated hWJ-MSCs and differentiated IPCs derived from them into the portal vein of rats with streptozotocin-induced diabetes, and recorded the physiological and pathological changes. RESULTS Using fluorescent staining and C-peptide enzyme-linked immunoassay, we were able to successfully induce the differentiation of hWJ-MSCs into IPCs. Transplantation of both IPCs derived from hWJ-MSCs and undifferentiated hWJMSCs had the therapeutic effect of ameliorating blood glucose levels and improving intraperitoneal glucose tolerance tests. The transplanted IPCs homed to the pancreas and functionally survived for at least 8 wk after transplantation, whereas the undifferentiated hWJ-MSCs were able to improve the insulitis and ameliorate the serum inflammatory cytokine in streptozotocin-induced diabetic rats. CONCLUSION Differentiated IPCs can significantly improve blood glucose levels in diabetic rats due to the continuous secretion of insulin by transplanted cells that survive in the islets of diabetic rats. Transplantation of undifferentiated hWJ-MSCs can significantly improve insulitis and re-balance the inflammatory condition in diabetic rats with only a slight improvement in blood glucose levels.