Diabetes is characterized by "glucotoxic" loss of pancreatic β cell function and insulin content, but underlying mechanisms remain unclear. A mouse model of insulin-secretory deficiency induced by β cell inexcitability (K_ATP gain of function) demonstrates development of diabetes and reiterates the features of human neonatal diabetes. In the diabetic state, β cells lose their mature identity and dedifferentiate to neurogenin3-positive and insulin-negative cells. Lineage-tracing experiments show that dedifferentiated cells can subsequently redifferentiate to mature neurogenin3-negative, insulin-positive β cells after lowering of blood glucose by insulin therapy. We demonstrate here that β cell dedifferentiation, rather than apoptosis, is the main mechanism of loss of insulin-positive cells, and redifferentiation accounts for restoration of insulin content and antidiabetic drug responsivity in these animals. These results may help explain gradual decrease in β cell mass in long-standing diabetes and recovery of β cell function and drug responsivity in type 2 diabetic patients following insulin therapy, and they suggest an approach to rescuing "exhausted" β cells in diabetes.