Diabetes results from an inadequate mass of functional β-cells. Such inadequacy could result from loss of β-cells due to an immune assault or the inability to compensate for insulin resistance. Thus, mechanisms that regulate the number of β-cells will be key to understanding both the pathogenesis of diabetes and for developing therapies. In this study, we show that cell cycle regulator p27 plays a crucial role in establishing the number of β-cells formed before birth. We show that p27 accumulates in terminally differentiated β-cells during embryogenesis. Disabling p27 allows newly differentiated β-cells that are normally quiescent during embryogenesis to reenter the cell cycle and proliferate. As a consequence, excess β-cells are generated in the p27^−/− mice, doubling their β-cell mass at birth. The early postnatal expansion of β-cell mass was unaffected in p27^−/− mice, indicating that the main function of p27 is to maintain the quiescent state of newly differentiated β-cells generated during embryogenesis. The expanded β-cell mass was accompanied by increased insulin secretion; however, the p27^−/− mice were glucose intolerant, as these mice were insulin insensitive. To assess the role of p27 to affect regeneration of β-cells in models of diabetes, p27^−/− mice were injected with streptozotocin (STZ). In contrast to control mice that displayed elevated blood glucose levels, p27^−/− mice showed decreased susceptibility to develop STZ-induced diabetes. Furthermore, β-cells retained the ability to reenter the cell cycle at a far greater frequency in p27^−/− mice after developing STZ-induced diabetes compared with wild-type littermates. These data indicate that p27 is a key regulator in establishing β-cell mass and an important target for facilitating β-cell regeneration in therapies for diabetes.