Objectives To explore the effect of recombinant LZ-8 (rLZ-8) on streptozocin (STZ)-induced diabetic rats and further illustrate its underlying mechanism. Methods Rats were intraperitoneally injected with single-dose STZ 50 mg/kg for induction of type 1 diabetes (T1D), and then, the diabetic rats were treated with rLZ-8 for 3 months. The clinical symptoms, fasting blood glucose, insulin, cytokines, histopathology, flow cytometry and immunofluorescence were used to evaluate the therapeutic effect and underlying mechanism of rLZ-8 on alleviating diabetes mellitus (DM). Key findings Treatment with rLZ-8 obviously alleviated the clinical symptoms of T1D and dose-dependently reduced the levels of blood glucose, blood lipid and haemoglobin A1c (HbA1c) in diabetic rat model. Meanwhile, rLZ-8 markedly increased insulin secretion and protected against STZ-induced pancreatic tissue injury. Additionally, rLZ-8 dramatically inhibited the levels of TNF-α and IL-1β, and obviously increased the level of IL-10 in serum and pancreas. Further investigation indicated that rLZ-8 treatment significantly increased the number of regulatory T cells (Tregs) and up-regulated the expression of Foxp3 to restore balance between anti-inflammatory and inflammatory cytokines. Conclusions These data suggest that rLZ-8 can antagonize STZ-induced T1D, and its mechanism may be related to inhibit inflammation and enhance Tregs generation.