The poly(ADP-ribose) polymerase (PARP) inhibitor, nicotinamide, induces differentiation and maturation of fetal pancreatic cells. In addition, we have previously reported evidence that nicotinamide increases the insulin content of cells differentiated from embryonic stem (ES) cells, but the possibility of nicotinamide acting as a differentiating agent on its own has never been completely explored. Islet cell differentiation was studied by: (i) X-gal staining after neomycin selection; (ii) BrdU studies; (iii) single and double immunohistochemistry for insulin, C-peptide and Glut-2; (iv) insulin and C-peptide content and secretion assays; and (v) transplantation of differentiated cells, under the kidney capsule, into streptozotocin (STZ)-diabetic mice. Here we show that undifferentiated mouse ES cells treated with nicotinamide: (i) showed an 80% decrease in cell proliferation; (ii) co-expressed insulin, C-peptide and Glut-2; (iii) had values of insulin and C-peptide corresponding to 10% of normal mouse islets; (iv) released insulin and C-peptide in response to stimulatory glucose concentrations; and (v) after transplantation into diabetic mice, normalized blood glucose levels over 7 weeks. Our data indicate that nicotinamide decreases ES cell proliferation and induces differentiation into insulin-secreting cells. Both aspects are very important when thinking about cell therapy for the treatment of diabetes based on ES cells.