Deiodinases are selenoproteins that activate or inactivate thyroid hormone. During vertebrate development, these pathways control thyroid hormone action in a cell-specific fashion explaining how systemic thyroid hormone can affect local control of tissue embryogenesis. Here we investigated the role of the thyroid hormone-inactivating deiodinase (D3) in pancreatic islet function and glucose homeostasis. D3 expression was determined by real-time PCR, immunofluorescence, and enzyme activity. Embryonic and adult wild-type mice and Mice with targeted disruption of Dio3 gene (D3KO) as well as human fetal pancreas and adult islets were studied. Insulin secretion was evaluated in adult mouse isolated islets. We found Dio3 gene expression and protein highly expressed in embryonic and adult pancreatic islets, predominantly in beta-cells in both humans and mice. However, mRNA levels were barely detectable for both the thyroid hormone-activating deiodinases types 1 and 2. D3KO animals were found to be glucose intolerant due to in vitro and in vivo impaired glucose-stimulated insulin secretion, without changes in peripheral sensitivity to insulin. D3KO neonatal (postnatal day 0) and adult pancreas exhibited reduced total islet area due to reduced beta-cell mass, insulin content, and impaired expression of key beta-cells genes. D3 expression in perinatal pancreatic beta-cells prevents untimely exposure to thyroid hormone, the absence of which leads to impaired beta-cell function and subsequently insulin secretion and glucose homeostasis. An analogous role is likely in humans, given the similar D3 expression pattern.