Surprisingly, the effect of acute diabetes on immunity has not been examined in detail. We, herein, show for the first time that untreated acute diabetes causes rapid lymphopenia followed by homeostatic T-cell proliferation. The diabetes-induced lymphopenia was associated with an immunosuppressed state that could be sufficiently strong to allow engraftment of fully allogeneic beta-cells or block rejection of islet transplants. In contrast, homeostatic proliferation and recovery of T-cell numbers were associated with islet rejection. Thus, the timing of islet transplant challenge in relation to diabetes induction was critical in determining whether islets were accepted or rejected. In addition, we tested whether diabetes-related immunosuppression could result in an overestimation of the efficacy of a tolerance-inducing protocol. Consistent with this possibility, a protocol targeting CD40L and ICOS that we have shown induces tolerance in diabetic recipients was unable to induce tolerance in non-diabetic recipients. The data uncover a previously unrecognized suppressive effect of diabetes on adaptive immunity. Furthermore, they suggest that the standard methods of testing new tolerance-inducing protocols in islet transplantation require modification and that diabetes itself can contribute to homeostatic proliferation, a process associated with autoimmunity and a resistance to tolerance induction.