Bone marrow was recently proposed as an alternative and potentially immune-privileged site for pancreatic islet transplantation. The aim of the present study was to assess the survival and rejection mechanisms of free and encapsulated xenogeneic islets transplanted into the medullary cavity of the femur, or under the kidney capsule of streptozotocin-induced diabetic C57BL/6 mice. The median survival of free rat islets transplanted into the bone marrow or under the kidney capsule was 9 and 14 days, respectively, whereas that of free human islets was shorter, 7 days (bone marrow) and 10 days (kidney capsule). Infiltrating CD8+ T cells and redistributed CD4+ T cells, and macrophages were detected around the transplanted islets in bone sections. Recipient mouse splenocytes proliferated in response to donor rat stimulator cells. One month after transplantation under both kidney capsule or into bone marrow, encapsulated rat islets had induced a similar degree of fibrotic reaction and still contained insulin positive cells. In conclusion, we successfully established a small animal model for xenogeneic islet transplantation into the bone marrow. The rejection of xenogeneic islets was associated with local and systemic T cell responses and macrophage recruitment. Although there was no evidence for immune-privilege, the bone marrow may represent a feasible site for encapsulated xenogeneic islet transplantation.