In this study, the hypoglycemic effect and possible mechanism of a polysaccharide, HEP-C, isolated from the fruit body of Hericium erinaceus were evaluated in streptozotoxin (STZ)-induced diabetic rats. Compared with the untreated STZ-induced diabetic rats, the supplements with HEP-C (150 and 300 mg/kg body weight [BW]) could significantly and dose-dependently relieve BW loss and organ injures, reduce fasting blood glucose, enhance glucose tolerance, alleviate hepatic function and serum lipid metabolism, elevate antioxidant enzyme activities, and suppress lipid peroxidation, which contributed to its potent hypoglycemic benefit. Liver histopathological observation revealed that HEP-C could effectively attenuate the deteriorated hepatic lesions in STZ-induced diabetic rats. HEP-C with potent hypoglycemic effect positively mediated glycogen synthesis by activating the phosphatidylinositol-3-kinase/protein kinase B signaling pathway. In summary, these results suggested that HEP-C, as a new dietary functional food or therapeutic agent, exhibited great potential for the prevention and treatment of diabetes mellitus and its complications.