We studied the process of trans-differentiation of human bone marrow mesenchymal stem cells (hBM-MSCs) into insulin-producing cells. Streptozotocin (STZ)-induced diabetic rat model was used to study the effect of portal vein transplantation of these insulin-producing cells on blood sugar levels. The BM-MSCs were differentiated into insulin-producing cells under defined conditions. Real-time PCR, immunocytochemistry and glucose challenge were used to evaluate in vitro differentiation. Flow cytometry showed that hBM-MSCs were strongly positive for CD44, CD105 and CD73 and negative for hematopoietic markers CD34, CD38 and CD45. Differentiated cells expressed C-peptide as well as β-cells specific genes and hormones. Glucose stimulation increased C-peptide secretion in these cells. The insulin-producing, differentiated cells were transplanted into the portal vein of STZ-induced diabetic rats using a Port-A catheter. The insulin-producing cells were localized in the liver of the recipient rat and expressed human C-peptide. Blood glucose levels were reduced in diabetic rats transplanted with insulin-producing cells. We concluded that hBM-MSCs could be trans-differentiated into insulin-producing cells in vitro. Portal vein transplantation of insulin-producing cells alleviated hyperglycemia in diabetic rats.