Placental tissue holds great promise as a source of cells for regenerative medicine due to its plasticity, and easy availability. Human placenta-derived mesenchymal stem cells (hPDMSCs) have the potential to differentiate into insulin-producing cells. Upon transplantation, they can reverse experimental diabetes in mice. However, it is not known whether culture-expanded undifferentiated hPDMSCs are capable of restoring normoglycemia upon transplantation in streptozotocin (STZ)-induced diabetic mice. Hence we prepared long-term cultures of hPDMSCs from the chorionic villi of full-term human placenta. Flow cytometry analyses and immunocytochemistry study revealed bonafide mesenchymal nature of the isolated hPDMSCs. These cultures could differentiate into adipogenic, oesteogenic, chondrogenic, and neuronal lineages on exposure to lineage-specific cocktails. Furthermore, we showed that hPDMSCs can form islet-like cell clusters (ILCs) on stepwise exposure to serum-free defined media containing specific growth factors and differentiating agents. qRT-PCR showed the expression of insulin, glucagon, and somatostatin in undifferentiated hPDMSCs and in ILCs. Differentiated ILCs were found to express human insulin, glucagon, and somatostatin by immunocytochemistry. Additionally, ILCs also showed abundance of pancreatic transcription factors ngn3 and isl1. Both undifferentiated hPDMSCs and ILCs exihibited insulin secretion in response to glucose. Transplantation of hPDMSCs or ILCs derived from hPDMSCs in STZ-induced diabetic mice led to restoration of normoglycemia. Our results demonstrate, for the first time, reversal of hyperglycemia by undifferentiated hPDMSCs and ILCs derived from hPDMSCs. These results suggest human placenta-derived MSCs as an alternative source for cell replacement therapy in diabetes.