Background: Diabetes is one of the major health issues globally. T1DM develops due to the destruction of pancreatic beta cells. Mesenchymal stem cells having remarkable self-renewal and differentiation potential, can regenerate beta cells. MSCs preconditioned with bioactive small molecules possess enhanced biological features and therapeutic potential under in vivo environment. Interestingly, compounds of naphthoquinone class possess anti-diabetic, anti-inflammatory properties, and can be explored as potential candidates for preconditioning MSCs. Aim: This study analyzed the effect of lawsone preconditioned human umbilical cord MSCs (hUMSCs) on the regeneration of β-cells in the STZ-induced type 1 diabetic rats. Methods: hUMSCs were isolated and characterized for the presence of surface markers. MSCs were preconditioned with optimized concentration of lawsone. T1D rat model was established by injecting 50 mg/kg of streptozotocin intraperitoneally. Untreated and lawsone preconditioned MSCs were transplanted into the diabetic rats via tail vein. Fasting blood sugar and body weight were monitored regularly for 4 weeks. Pancreas was harvested and beta cell regeneration was evaluated by H&E staining and gene expression analysis. Immunohistochemistry was also done to assess the insulin protein expression. Results: Lawsone preconditioned MSCs showed better anti-hyperglycemic effect, compared to untreated MSCs. Histological analysis presented the regeneration of islets of Langerhans with higher expression of β-cell genes and reduced expression of inflammatory markers. Immunohistochemistry revealed intense insulin expression in the preconditioned compared to the untreated MSCs. Conclusion: It is concluded from the present study that lawsone preconditioned MSCs were able to exhibit pronounced anti-hyperglycemic effect in vivo compared to MSCs alone.