Allogeneic islet transplantation is an important therapeutic approach for the treatment of T1D. Clinical application of this approach, however, is severely curtailed by allograft rejection primarily initiated by pathogenic T effector cells regardless of chronic use of immunosuppression. Given the role of Fas-mediated signaling in regulating T effector cell responses, we tested if pancreatic islets can be engineered ex vivo to display on their surface an apoptotic form of FasL protein chimeric with streptavidin (SA-FasL), and whether such engineered islets induce tolerance in allogeneic hosts. Islets were modified with biotin following efficient engineering with SA-FasL protein that persisted on the surface of islets for over a week in vitro. SA-FasL-engineered islet grafts established euglycemia in chemically diabetic syngeneic mice indefinitely, demonstrating functionality and lack of acute toxicity. Most importantly, the transplantation of SA-FasL-engineered BALB/c islet grafts in conjunction with a short course of rapamycin treatment resulted in robust localized tolerance in 100% C57BL/6 recipients. Tolerance was initiated and maintained by CD4+CD25+FoxP3+ T regulatory (Treg) cells as their depletion early during tolerance induction or late after established tolerance resulted in prompt graft rejection. Furthermore, Treg cells sorted from graft-draining lymph nodes, but not spleen, of long-term graft recipients prevented the rejection of unmodified allogeneic islets in an adoptive transfer model, further confirming the Treg role in established tolerance. Engineering islets ex vivo in a rapid and efficient manner to display on their surface immunomodulatory proteins represents a novel, safe, and clinically applicable approach with important implications for the treatment of T1D.