Background: Diabetic nephropathy (DN) is a severe complication of diabetes mellitus (DM). Pancreas or islet transplantation has been reported to prevent the development of DN lesions and ameliorate or reverse existing glomerular lesions in animal models. Shortage of pancreas donor is a severe problem. Islets derived from stem cells may offer a potential solution to this problem. Objective: To evaluate the effect of stem cell-derived islet transplantation on DN in a rat model of streptozotocininduced DM. Methods: Pancreatic progenitor cells were isolated from aborted fetuses of 8 weeks of gestation. And islets were prepared by suspension culture after a differentiation of progenitor cells in medium containing glucagon-like peptide-1 (Glp-1) and nicotinamide. Then islets were transplanted into the liver of diabetic rats via portal vein. Blood glucose, urinary volume, 24 h urinary protein and urinary albumin were measured once biweekly for 16 weeks. Graft survival was evaluated by monitoring human C-peptide level in rat sera and by immunohistochemical staining for human mitochondrial antigen and human C-peptide in liver tissue. The effect of progenitor-derived islets on filtration membrane was examined by electron microscopy and real-time polymerase chain reaction (PCR). Immunohistochemical staining, real-time PCR and western blot were employed for detecting fibronectin, protein kinase C beta (PKC beta, protein kinase A (PKA), inducible nitric oxide synthase (iNOS) and superoxide dismutase (SOD). Results: Islet-like clusters derived from 8th gestational-week human fetal pancreatic progenitors survived in rat liver. And elevated serum level of human C-peptide was detected. Blood glucose, 24 h urinary protein and urinary albumin were lower in progenitor cell group than those in DN or insulin treatment group. Glomerular basement membrane thickness and fibronectin accumulation decreased significantly while podocytes improved morphologically in progenitor cell group. Furthermore, receptor of advanced glycation end products and PKC beta became down-regulated whereas PKA up-regulated by progenitor cell-derived islets. And iNOS rose while SOD declined. Conclusions: DN may be reversed by transplantation of human fetal pancreatic progenitor cell-derived islets. And fetal pancreatic progenitor cells offer potential resources for cell replacement therapy.