Aims/hypothesisEndothelial cells (ECs) play an essential role in pancreatic organogenesis. We hypothesise that effective in vitro interactions between human microvascular endothelial cells (HMECs) and human pluripotent stem cells (hPSCs) results in the generation of functional pancreatic beta cells.MethodsEmbryoid bodies (EBs) derived from hPSCs were cultured alone (controls) or with ECs in collagen gels. Subsequently, cells were analysed for pancreatic beta cell markers, and then isolated and expanded. Insulin secretion in response to glucose was evaluated in vitro by static and dynamic (perifusion) assays, and in vivo by EB transplantation into immunodeficient mice.ResultsCo-cultured EBs had a higher expression of mature beta cells markers and enhanced insulin secretion in vitro, compared with controls. In mice, transplanted EBs had higher levels of human C-peptide secretion with a significant reduction in hyperglycaemia after the selective destruction of native pancreatic beta cells. In addition, there was significant in vitro upregulation of bone morphogenetic proteins 2 and 4 (BMP-2, 4) in co-cultured cells, compared with controls.Conclusions/interpretationECs provide essential signalling in vitro, such as activation of the BMP pathway, for derivation of functional insulin-producing beta cells from hPSCs.Electronic supplementary materialThe online version of this article (doi:10.1007/s00125-016-4078-1) contains peer-reviewed but unedited supplementary material, which is available to authorised users.