Recent evidence has suggested that human skin fibroblasts may represent a novel source of therapeutic stem cells. In this study, we report a 3-stage method to induce the differentiation of skin fibroblasts into insulin-producing cells (IPCs). In stage 1, we establish the isolation, expansion and characterization of mesenchymal stem cells from human labia minora dermis-derived fibroblasts (hLMDFs) (stage 1: MSC expansion). hLMDFs express the typical mesenchymal stem cell marker proteins and can differentiate into adipocytes, osteoblasts, chondrocytes or muscle cells. In stage 2, DMEM/F12 serum-free medium with ITS mix (insulin, transferrin, and selenite) is used to induce differentiation of hLMDFs into endoderm-like cells, as determined by the expression of the endoderm markers Sox17, Foxa2, and PDX1 (stage 2: mesenchymal-endoderm transition). In stage 3, cells in the mesenchymal-endoderm transition stage are treated with nicotinamide in order to further differentiate into self-assembled, 3-dimensional islet cell-like clusters that express multiple genes related to pancreatic ${eta}$-cell development and function (stage 3: IPC). We also found that the transplantation of IPCs can normalize blood glucose levels and rescue glucose homeostasis in streptozotocin-induced diabetic mice. These results indicate that hLMDFs have the capacity to differentiate into functionally competent IPCs and represent a potential cell-based treatment for diabetes mellitus.