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Allogenic islet transplantation is a most efficient approach for treatment of diabetes mellitus. However, the scarcity of islets and long term need for an immunosuppressant limits its application. Recently, cell replacement therapies that generate of unlimited sources of β cells have been developed to overcome these limitations. In this study we have described a stage specific differentiation protocol for the generation of insulin producing islet-like clusters from human bone marrow mesenchymal stem cells (hBM-MSCs). This specific stepwise protocol induced differentiation of hMSCs into definitive endoderm, pancreatic endoderm and pancreatic endocrine cells that expressed of sox17, foxa2, pdx1, ngn3, nkx2.2, insulin, glucagon, somatostatin, pancreatic polypeptide, and glut2 transcripts respectively. In addition, immunocytochemical analysis confirmed protein expression of the above mentioned genes. Western blot analysis discriminated insulin from proinsulin in the final differentiated cells. In derived insulin producing cells (IPCs), secreted insulin and C-peptide was in a glucose dependent manner. We have developed a protocol that generates effective high-yield human IPCs from hBM-MSCs in vitro. These finding suggest that functional IPCs generated by this procedure can be used as a cell-based approach for insulin dependent diabetes mellitus.