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Context Beta-cells have a limited replicative capacity; hence, there is always a quest for sources of islet regeneration to compensate for the loss of functional beta-cells in diabetes. Objective To test the hypothesis of whether intra islet precursor cells of islets isolated from a diabetic pancreas and in vitro streptozotocin treated islets are capable of giving rise to neoislets. Interventions Streptozotocin treatment was given to mice and to islets isolated from normal mice. Islets were isolated from diabetic mice, cultured on matrigel coated plates with a well-defined serum free medium containing mitotic (nicotinamide) and differentiating (keratinocyte growth factor) agents. Initially, islets gave rise to an epithelial-like cell monolayer and, later on, differentiated into islet-like clusters. These were characterized for the ductal epithelial cell specific markers cytokeratin-19 and cytokeratin-7 and for the islet specific markers-insulin and PDX1. Insulin secretion in response to glucose and L-arginine was estimated by ELISA. Results A cytokeratin-19 and cytokeratin-7 positive precursor cell population was found scattered throughout the epithelial monolayer. Upon addition of the keratinocyte growth factor, these precursor cells gave rise to isletlike clusters which were confirmed to be islets by marker studies. Though streptozotocin treatment on islets of normal mice allowed proliferation of the epithelial monolayer, it did not give rise to neoislets under similar growth conditions. Conclusion The present study reveals that streptozotocin treatment of normal islets in vitro leads to the loss of the potential of intra islet precursor cells to form neoislets; however, in streptozotocin-induced experimental diabetes, they retain their potential to generate new islets opening a novel putative way of treating diabetes.