Bone marrow mesenchymal stem cells (BMSCs) have been shown to ameliorate diabetes in animal models. The mechanism, however, remains largely unknown. An unanswered question is whether BMSCs are able to differentiate into β-cells in vivo, or whether BMSCs are able to mediate recovery and/or regeneration of endogenous β-cells. Here we examined these questions by testing the ability of hBMSCs genetically modified to transiently express vascular endothelial growth factor (VEGF) or pancreatic-duodenal homeobox 1 (PDX1) to reverse diabetes and whether these cells were differentiated into β-cells or mediated recovery through alternative mechanisms. Human BMSCs expressing VEGF and PDX1 reversed hyperglycemia in more than half of the diabetic mice and induced overall improved survival and weight maintenance in all mice. Recovery was sustained only in the mice treated with hBMSCs-VEGF. However, de novo β-cell differentiation from human cells was observed in mice in both cases, treated with either hBMSCs-VEGF or hBMSCs- PDX1, confirmed by detectable level of serum human insulin. Sustained reversion of diabetes mediated by hBMSCs-VEGF was secondary to endogenous β-cell regeneration and correlated with activation of the insulin/IGF receptor signaling pathway involved in maintaining β-cell mass and function. Our study demonstrated the possible benefit of hBMSCs for the treatment of insulin-dependent diabetes and gives new insight into the mechanism of β-cell recovery after injury mediated by hBMSC therapy.