Partial pancreatic duct obstruction in the hamster leads to the induction of endocrine-cell differentiation and new islet formation. We prepared cytosolic extracts from the partially obstructed pancreas and identified one, which when administered i.p., produced significant increases in the incorporation of tritiated thymidine by ductular and islet cells, as well as a corresponding increase in islet mass. In this study, we evaluate the ability of this extract to reverse streptozotocin diabetes mellitus. Hamsters were treated i. p. twice daily for 7 weeks with either 0.9% NaCl (saline) (n=10) or a cytosol extract (n=10) prepared previously from partially obstructed hamster pancreata. All animals in the cytosol group survived vs only 60% of the saline group (p=0.02). Random blood glucose levels were greater than 22.2 mmol/l in 90% of the saline group vs 40% in the cytosol group (p<0.05). Pancreatic tissue from the surviving saline animals and from persistently hyperglycaemic cytosol-treated animals, showed intra-cytoplasmic vacuolation of islet cells, a characteristic lesion of sustained hyperglycaemic states. Vacuolation was not observed in normoglycaemic extract treated animals. Islets in hyperglycaemic animals demonstrated a profound decrease or absence of immunoreactive insulin, compared to an abundance of immunoreactive beta cells in cytosol-treated animals that reverted to normoglycaemia. In this group, single cells or nests of cells stained for insulin or glucagon cells were identified in ductal epithelium in association with cells budding from the duct. Morphometric analysis of pancreata in reverted cytosol-treated animals showed a new population of small islets compared with saline controls and an increased islet mass. In summary, streptozotocin diabetes can be reversed by new islet formation induced by local pancreatic growth factors, the exact nature of which remains to be determined.