Diabetes is one of the major health issues globally. Type 1 diabetes mellitus develops due to the destruction of pancreatic β cells. Mesenchymal stem cells (MSCs) having remarkable self-renewal and differentiation potential, can regenerate β cells. MSCs preconditioned with bioactive small molecules possess enhanced biological features and therapeutic potential under in vivo environment. Interestingly, compounds of naphthoquinone class possess antidiabetic and anti-inflammatory properties, and can be explored as potential candidates for preconditioning MSCs. This study analyzed the effect of lawsone-preconditioned human umbilical cord MSCs (hUMSCs) on the regeneration of β cells in the streptozotocin (STZ)-induced Type 1 diabetes (T1D) rats. 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 STZ intraperitoneally. Untreated and lawsone-preconditioned hUMSCs 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 β cell regeneration was evaluated by hematoxylin and eosin staining, and gene expression analysis. Immunohistochemistry was also done to assess the insulin expression. Lawsone-preconditioned hUMSCs showed better anti-hyperglycemic effect in comparison with untreated hUMSCs. Histological analysis presented the regeneration of islets of Langerhans with upregulated expression of βcell genes and reduced expression of inflammatory markers. Immunohistochemistry revealed strong insulin expression in the preconditioned hUMSCs compared with the untreated hUMSCs. It is concluded from the present study that lawsone-preconditioned hMSCs were able to exhibit pronounced anti-hyperglycemic effect in vivo compared with hUMSCs alone.