Mouse embryonic stem (ES) cells differentiate into cells of all three primary germ layers including endodermal cells that produce insulin in vitro. We show that constitutive expression of Pax4 (Pax4(+)), and to a lesser extent Pdx1 (Pdx1(+)), affects the differentiation of ES cells and significantly promote the development of insulin-producing cells. In Pax4 overexpressing R1 ES cells, isl-1, ngn3, insulin, islet amyloid polypeptide, and glucose transporter 2 (Glut-2) mRNA levels increase significantly. The number of nestin-expressing (nestin+) cells also increases. Constitutive Pax4 expression combined with selection of nestin+ cells and histotypic culture conditions give rise to spheroids containing insulin-positive granules typical of embryonal and adult beta cells. In response to glucose, Pax4(+) and wild-type ES-derived cells release insulin. Transplantation of these cells into streptozotocin-treated diabetic mice results in a normalization of blood glucose levels. We conclude that constitutive expression of Pax4 in combination with histotypic cultivation facilitates ES cell differentiation into the pancreatic lineage, which leads to the formation of islet-like spheroid structures that produce increased levels of insulin.