Immunosuppressive drugs successfully prevent rejection of islet allografts in the treatment of type I diabetes. However, the drugs also suppress systemic immunity increasing the risk of opportunistic infection and cancer development in allograft recipients. In this study, we investigated a new treatment for autoimmune diabetes using naturally immune privileged, hair follicle derived, autologous cells to provide localized immune protection of islet allotransplants. Islets from Balb/c mouse donors were cotransplanted with syngeneic hair follicle dermal sheath cup cells (DSCC, group 1) or fibroblasts (FB, group 2) under the kidney capsule of immune-competent, streptozotocin induced, diabetic C57BL/6 recipients. Group 1 allografts survived significantly longer than group 2 (32.2 ± 12.2 versus 14.1 ± 3.3 days, P < 0.001) without administration of any systemic immunosuppressive agents. DSCC reduced T cell activation in the renal lymph node, prevented graft infiltrates, modulated inflammatory chemokine and cytokine profiles, and preserved better beta cell function in the islet allografts, but no systemic immunosuppression was observed. In summary, DSCC prolong islet allograft survival without systemic immunosuppression by local modulation of alloimmune responses, enhancing of beta cell survival, and promoting of graft revascularization. This novel finding demonstrates the capacity of easily accessible hair follicle cells to be used as local immunosuppression agents in islet transplantation.