Understanding the factors and mechanisms involved in beta-cell development will guide therapeutic efforts to generate fully functional beta cells for diabetes. Neurogenin 3 (NGN3) is the key transcription factor that marks endocrine progenitors and drives beta-cell differentiation. Here we screen for binding partners of NGN3 and identify the deubiquitylating enzyme USP7 as a key regulator of NGN3 stability. Mechanistically, USP7 interacts with, deubiquitinates and stabilizes NGN3. In vivo, conditional knockout of Usp7 in the mouse embryonic pancreas causes a dramatic reduction in islet formation and hyperglycemia in adult mice, due to impaired NGN3-mediated endocrine specification during pancreatic development. Furthermore, pharmacological inhibition of USP7 during endocrine specification in human iPSC models of beta-cell differentiation decreases NGN3 expressing progenitor cell numbers and impairs beta cell differentiation. Thus, the USP7-NGN3 axis is an essential mechanism for driving endocrine development and beta-cell differentiation, which can be therapeutically exploited.