Non-obese diabetic (NOD) mice that are genetically deficient in either IFN-gamma or beta chain of the IFN-gammaR develop diabetes with similar kinetics to wild-type NOD mice. In the current study, we demonstrated that treatment of IFN-gamma signaling-deficient NOD mice with cyclophosphamide (CY) not only fails to induce acute diabetes but also confers permanent protection from diabetes. Protection was mediated by the preferential generation of regulatory T cells (Treg cells) that are capable of suppressing the diabetogenic process, with no change in the total number and function of Treg cells. Moreover, CY treatment of IFN-gamma signaling-deficient NOD mice reversed the ongoing pathogenic process and eliminated cellular infiltrates of pancreatic islets. While these results have been derived using a genetically modified mouse model of diabetes, they indicate that knowledge of host genetic factors and environmental factors influencing the development of Type I diabetes mellitus may provide a rational approach to develop a means to reverse the development of Type I diabetes in human.