Induction of hematopoietic chimerism and subsequent donor-specific immune tolerance via bone marrow transplantation is an ideal approach for islet transplantation to treat type-1 diabetes. We examined the potential of mesenchymal stem cells (MSCs) in the induction of chimerism and islet allograft tolerance without the incidence of graft-versus-host disease (GVHD). Streptozotocin-diabetic rats received a conditioning regimen consisting of antilymphocyte serum and 5 Gy total body irradiation, followed by an intraportal co-infusion of allogeneic MSCs, bone marrow cells (BMCs) and islets. Although all the recipients rejected the islets initially, half of them developed stable mixed chimerism and donor-specific immune tolerance, shown by the engraftment of donor skin and second-set islet transplants and acute rejection of a third-party skin. The engraftment of the primary islet allografts with stable chimerism was achieved by the addition of a 2-week peritransplant administration of 15-deoxyspergualin (DSG). Without MSCs, none of the recipients treated with DSG developed chimerism or reversal of diabetes. GVHD was not observed in any of the recipients infused with MSCs (0/15), whereas it occurred in 4/11 recipients without MSCs. These results indicate a potential use of MSCs for induction of hematopoietic chimerism and subsequent immune tolerance in clinical islet transplantation.